What Tax Advantaged Account To Put 1099 Income

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ef11
Posts: 198
Joined: Sat Mar 10, 2012 10:39 pm

What Tax Advantaged Account To Put 1099 Income

Post by ef11 » Sat Mar 10, 2018 7:16 pm

Hello all,

I will try to keep this simple. I am trying to determine what type of tax advantaged account (SEP-IRA, Solo 401K, etc.) to put my secondary 1099 income into.

Details about my situation below:
- I am a W2 employee for my main job, and I max my 401K every year plus get an employer match plus do a Mega Backdoor Roth.
- Total contributions including match to my 401K in 2017 were $45,313.
- I receive $10-15,000 a year as 1099 income each year, which could potentially go up greatly over the next few months/years. I would like to tax advantage as much of this money as possible. I am paid this as a contractor basically and I have no employees of my own.
- ADDED - My employer where I receive 1099 pay does not provide any employer 401K contributions and no employees there have a solo 401K, only SEP-IRAs.
- ADDED - There is a 50/50 chance that within the next year or two I am no longer a W2 employee and go to work full time at the employer that currently pays me via 1099. At this point I would immediately be able to reach the ~$54,000 maximum to a SEP-IRA as that would be less than 25% of my 1099 income.

Questions:
1. I believe since I already participate in an employer sponsored 401K, I cannot have a solo 401K? And if I can, I believe I can only contribute 25% of my 1099 income to it and not the full amount up to $18,500. Is this correct?
2. It seems a SEP-IRA is the most simple, but it also only let's me contribute up to 25% of my 1099 income to it.
3. Is there any way to contribute more than 25% of my 1099 income into a tax advantaged account given the fact that I am also participating in an employer sponsored 401K? .
ADDED 4. Given the fact that no employer contributions will ever happen where I receive 1099 Income, and the fact that I might soon make that my only income stream, A Solo 401K seems to be not as good as I can only contribute $18,500 (if this is my only income stream) whereas with a SEP-IRA I can contribute $54,000 tax advantaged.

Thanks for any help, I have dug around and read several articles, but can't seem to get complete clarity on what the best choice is given that I am also in a employer sponsored 401K.
Last edited by ef11 on Sun Mar 11, 2018 9:11 am, edited 1 time in total.
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PFInterest
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Re: What Tax Advantaged Account To Put 1099 Income

Post by PFInterest » Sat Mar 10, 2018 7:19 pm

You can have a solo 401k.

Spirit Rider
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Re: What Tax Advantaged Account To Put 1099 Income

Post by Spirit Rider » Sat Mar 10, 2018 8:51 pm

  1. Yes as PFInterest said; you can have a one-participant 401k, but like you said; there is an employee deferral limit (2018 = $18.5K) for all qualified plans. Maximum employer contributions are 25% of compensation, but for the self-employed are calculated as 20% of net self-employment earnings (business profit - 1/2 SE tax). It has nothing to do with the $18.5K limit, but there is an annual addition limit (2018 = $55K) for all employee + employer contributions to each unaffiliated employer. So the contributions to your W-2 employer do not interfere with a SEP IRA or a one-participant 401k.
  2. The maximum employer contribution is the same for a SEP IRA as a one-participant 401k.
  3. As I pointed out your other contributions to another 401k except deferrals are irrelevant. There are other options, but they are not efficient or practical at your income level.

ef11
Posts: 198
Joined: Sat Mar 10, 2012 10:39 pm

Re: What Tax Advantaged Account To Put 1099 Income

Post by ef11 » Sun Mar 11, 2018 9:11 am

I added two additional points to my initial post:

- ADDED - My employer where I receive 1099 pay does not provide any employer 401K contributions and no employees there have a solo 401K, only SEP-IRAs.
- ADDED - There is a 50/50 chance that within the next year or two I am no longer a W2 employee and go to work full time at the employer that currently pays me via 1099. At this point I would immediately be able to reach the ~$54,000 maximum to a SEP-IRA as that would be less than 25% of my 1099 income.
45% Vang S&P500 Fund ER .011% | 10% Vang Extended Market Fund ER .038% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .027% | 10% Fidelity MSCI Real Estate ER 0.084%

ef11
Posts: 198
Joined: Sat Mar 10, 2012 10:39 pm

Re: What Tax Advantaged Account To Put 1099 Income

Post by ef11 » Sun Mar 11, 2018 9:18 am

Spirit Rider wrote:
Sat Mar 10, 2018 8:51 pm
  1. Yes as PFInterest said; you can have a one-participant 401k, but like you said; there is an employee deferral limit (2018 = $18.5K) for all qualified plans. So since I am already maxing out my W2 Employer Sponsored 401K, the Solo 401K does nothing for me, correct? Maximum employer contributions are 25% of compensation Since there are no employer contributions, just myself as a 1099 employee, this doesn't really matter right? Or are you considering myself to be the employer with the 1099 income?, but for the self-employed are calculated as 20% of net self-employment earnings (business profit - 1/2 SE tax). It has nothing to do with the $18.5K limit, but there is an annual addition limit (2018 = $55K) for all employee + employer contributions to each unaffiliated employer. So the contributions to your W-2 employer do not interfere with a SEP IRA or a one-participant 401k.
  2. The maximum employer contribution is the same for a SEP IRA as a one-participant 401k. As stated, since there is no employer contribution for the 1099 income I think this is irrelevant. I just need to be able to tax advantage as much money as possible and it seems like a SEP might be the best way. I understand if I owned the company and paid myself via 1099 I could also contribute to myself as an employer, but this is not the case here. I am paid as a contractor on 1099.
  3. As I pointed out your other contributions to another 401k except deferrals are irrelevant. There are other options, but they are not efficient or practical at your income level.
My comments above in red, thank you for the reply.

Do you have recommendation of which I should do in my case? It really seems like the SEP-IRA makes the most sense due to the fact that I don't own this business and there is no employer contributions.
45% Vang S&P500 Fund ER .011% | 10% Vang Extended Market Fund ER .038% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .027% | 10% Fidelity MSCI Real Estate ER 0.084%

TwstdSista
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Re: What Tax Advantaged Account To Put 1099 Income

Post by TwstdSista » Sun Mar 11, 2018 9:28 am

I would do a solo 401k for this reason: Backdoor Roth IRAs. If your income level is or becomes too high for a direct Roth IRA contribution, you can do a Backdoor Roth. However, the existence of any traditional-type IRAs (including SEP, SIMPLE and Inherited) triggers the pro-rata rule with a Backdoor Roth and makes it much more complicated.

Even if your income is extremely unlikely to ever reach this point, it's good to keep the possibility open....

feehater
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Re: What Tax Advantaged Account To Put 1099 Income

Post by feehater » Sun Mar 11, 2018 10:23 am

ef11 wrote:
Sun Mar 11, 2018 9:18 am
Spirit Rider wrote:
Sat Mar 10, 2018 8:51 pm
  1. Yes as PFInterest said; you can have a one-participant 401k, but like you said; there is an employee deferral limit (2018 = $18.5K) for all qualified plans. So since I am already maxing out my W2 Employer Sponsored 401K, the Solo 401K does nothing for me, correct? Maximum employer contributions are 25% of compensation Since there are no employer contributions, just myself as a 1099 employee, this doesn't really matter right? Or are you considering myself to be the employer with the 1099 income?, but for the self-employed are calculated as 20% of net self-employment earnings (business profit - 1/2 SE tax). It has nothing to do with the $18.5K limit, but there is an annual addition limit (2018 = $55K) for all employee + employer contributions to each unaffiliated employer. So the contributions to your W-2 employer do not interfere with a SEP IRA or a one-participant 401k.
  2. The maximum employer contribution is the same for a SEP IRA as a one-participant 401k. As stated, since there is no employer contribution for the 1099 income I think this is irrelevant. I just need to be able to tax advantage as much money as possible and it seems like a SEP might be the best way. I understand if I owned the company and paid myself via 1099 I could also contribute to myself as an employer, but this is not the case here. I am paid as a contractor on 1099.
  3. As I pointed out your other contributions to another 401k except deferrals are irrelevant. There are other options, but they are not efficient or practical at your income level.
My comments above in red, thank you for the reply.

Do you have recommendation of which I should do in my case? It really seems like the SEP-IRA makes the most sense due to the fact that I don't own this business and there is no employer contributions.
In a 1099 situation you are both the employee and the employer, so you are who Spirit Rider is talking about when he says employer contribution. You are technically a small business that is contracting with the other company to provide a service.

Spirit Rider
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Re: What Tax Advantaged Account To Put 1099 Income

Post by Spirit Rider » Sun Mar 11, 2018 11:26 am

As pointed out by feehateer: When you have your own business you are both employer and employee for employer retirement plan purposes.
ef11 wrote:
Sun Mar 11, 2018 9:11 am
- ADDED - My employer where I receive 1099 pay does not provide any employer 401K contributions and no employees there have a solo 401K, only SEP-IRAs.
You do not receive a 1099 from an employer. They are a client of your Independent Contracting (IC) business. Since they are not your employer, you are not an employee eligible for their 401k.
- ADDED - There is a 50/50 chance that within the next year or two I am no longer a W2 employee and go to work full time at the employer that currently pays me via 1099. At this point I would immediately be able to reach the ~$54,000 maximum to a SEP-IRA as that would be less than 25% of my 1099 income.
You can reach the 2018 $55K limit with a one-participant 401k on lower net self-employment earnings. You can make either traditional or Roth elective employee contributions (2018 = $18.5K) + employer contributions up to $55K in 2018. Here again self-employed maximum employer contributions are calculated as 20% (not 25%) of net self-employment earnings. You can reach the $55k limit on $182.5K net self-employment earnings ($18.5K + $36.5K) vs. $275K with a SEP IRA.

ef11
Posts: 198
Joined: Sat Mar 10, 2012 10:39 pm

Re: What Tax Advantaged Account To Put 1099 Income

Post by ef11 » Wed Mar 14, 2018 9:23 pm

Thank you all for the replies.

So to summarize, the current 401K I have and the contributions to it in no way impact my ability to use a Solo 401K. I can open a Solo 401K and contribute all of the $10-15,000 1099 income as a traditional Solo 401K contribution since it is less than the $18,500 limit and basically pay little to no tax on that money as it is a tax deductible contribution, is that correct? If so, this is definitely the way to go as I can tax advantage all of that money and not just 20-25% of it.

Now for future case, once my 1099 income is much greater than just the $18,500 limit, how are the employer contributions to max it out at $55,000 seen from a tax perspective? With a SEP I can contribute $55,000 tax deductible is my understanding. WIth the Solo 401K I can contribute the $18,500 as a traditional (deductible) contribution, but what about the other $36,500 employer contribution that really is coming out of my pocket? Is that tax deductible as well so it acts the same as the SEP contribution?

Finally, I believe I have to have this set up and contributed to before the tax filing deadline. Is a Solo 401K easy to setup and do I have to pay an administer or anything like that? If so, not sure I can get it all squared away within a month but hopefully so. Not sure if I can easily set this up with Fidelity where all of my other accounts are or not.

Thanks again
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patrick
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Re: What Tax Advantaged Account To Put 1099 Income

Post by patrick » Wed Mar 14, 2018 10:11 pm

ef11 wrote:
Wed Mar 14, 2018 9:23 pm
So to summarize, the current 401K I have and the contributions to it in no way impact my ability to use a Solo 401K. I can open a Solo 401K and contribute all of the $10-15,000 1099 income as a traditional Solo 401K contribution since it is less than the $18,500 limit and basically pay little to no tax on that money as it is a tax deductible contribution, is that correct? If so, this is definitely the way to go as I can tax advantage all of that money and not just 20-25% of it.
That is not correct. See https://www.irs.gov/retirement-plans/pl ... ion-limits

The $18500 limit on employEE contributions is shared among all your 401ks (and 403bs too). If you make $18500 in employEE contributions at your regular job this means you can't make any employEE contributions to the solo 401k.

You can however make employER contributions. These are subject to both the percentage limit and the $55,000 total limit per plan, but are not effected by contributions to other plans.
Finally, I believe I have to have this set up and contributed to before the tax filing deadline. Is a Solo 401K easy to setup and do I have to pay an administer or anything like that? If so, not sure I can get it all squared away within a month but hopefully so. Not sure if I can easily set this up with Fidelity where all of my other accounts are or not.
It may already be too late to set it up -- according to https://www.irs.gov/retirement-plans/ma ... calendar-4 you had to establish it by December 31 to make employEE contributions ("elective deferrals") though I don't see a clear rule for employER contributions.

I set one up with Vanguard a few years back -- the forms were perhaps twice as long as for an IRA, and had to be mailed rather than set up online. I would guess Fidelity is similar. I don't think there should usually be extra fees above a regular account for the solo 401K, though for some reason Vanguard didn't allow Admiral shares (not sure if that's still the case).

Spirit Rider
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Re: What Tax Advantaged Account To Put 1099 Income

Post by Spirit Rider » Wed Mar 14, 2018 10:43 pm

ef11 wrote:
Wed Mar 14, 2018 9:23 pm
So to summarize, the current 401K I have and the contributions to it in no way impact my ability to use a Solo 401K. I can open a Solo 401K and contribute all of the $10-15,000 1099 income as a traditional Solo 401K contribution since it is less than the $18,500 limit and basically pay little to no tax on that money as it is a tax deductible contribution, is that correct? If so, this is definitely the way to go as I can tax advantage all of that money and not just 20-25% of it.
No, as I pointed out in my very 1st reply and just now by Patrick. There is a single employee deferral limit (2018 = $18.5K) for all qualified plans. Since you indicated that you make the maximum employee deferral in your W-2 employer's 401k plan, you can not make any deferrals in a one-participant 401k plan.
Now for future case, once my 1099 income is much greater than just the $18,500 limit, how are the employer contributions to max it out at $55,000 seen from a tax perspective? With a SEP I can contribute $55,000 tax deductible is my understanding. WIth the Solo 401K I can contribute the $18,500 as a traditional (deductible) contribution, but what about the other $36,500 employer contribution that really is coming out of my pocket? Is that tax deductible as well so it acts the same as the SEP contribution?
Not that they apply to you, traditional 401k contributions are deductible, but Rotk 401k contributions are not. Employer contributions are deductible.
Finally, I believe I have to have this set up and contributed to before the tax filing deadline. Is a Solo 401K easy to setup and do I have to pay an administer or anything like that? If so, not sure I can get it all squared away within a month but hopefully so. Not sure if I can easily set this up with Fidelity where all of my other accounts are or not.
Are we talking about the 2017 tax year or the 2018 tax year? A one-participant 401k must be adopted by 12/31 of the tax year. Therefore, it is too late to adopt one for the 2017 tax year. A SEP IRA may be adopted and contributions made by the tax filing deadline including extensions. For the 2017 tax year this is 04/17/2018 and 10/15/2018 respectively.

ef11
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Re: What Tax Advantaged Account To Put 1099 Income

Post by ef11 » Thu Mar 15, 2018 8:19 am

Patrick, Spirit, thank you both for the help on this. I think I now have a better understanding.

For 2017 I guess it is a mute point, I was unaware it had to be established by 12/31 of the same year. I would just set up a SEP-IRA this year and then a Solo 401K for 2018, but having a couple thousand in a SEP doesn't really make sense, I'll just pay the tax since it's a small amount.

If I did have a Solo 401K open, then due to the fact I already contributed $18,500 to my W2 Employer sponsored 401K, I would only be able to contribute to my Solo 401K as an employer which is at 20% of net self-employment earnings.

So essentially if my current situation continues with a maxed out W2 employer sponsored plan then there isn't much difference between a SEP and Solo 401K it seems, both are restricted to 20% of net self-employement earnings. However, if I leave my W2 job and only have 1099 income, the Solo is more attractive as I can reach maximum deductible contributions of $55,000 at a lower income level.

Thanks again, I was really struggling to find all of these details online but now I think I have it down (and if not, please let me know!). This year is a whirlwind so far, setting up a family LLC for inherited assets, exploring a new W2 employer opportunity, and growing the 1099 income.
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aristotelian
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Re: What Tax Advantaged Account To Put 1099 Income

Post by aristotelian » Thu Mar 15, 2018 8:31 am

I believe your added #4 is wrong. Solo 401k gives you the option of both employ-ee and employ-er contributions. For now, you could use it like an SEP and only make emploey-er contributions, since you are maxing your $18.5k through your W-2 plan. When this job becomes your primary income, you would do both employe-ee and employ-er just like a normal 401k.

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