1099 income--Solo 401k or something else?

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E5797
Posts: 25
Joined: Wed Feb 17, 2016 7:23 am

1099 income--Solo 401k or something else?

Post by E5797 » Sat Sep 08, 2018 12:57 pm

I'll be changing jobs and will have some 1099 income in the interim and looking for advice on the best use of the money.

Currently I am paid on W2 and have access to 401k and I do contribute to a back door Roth IRA each year. I will be taking a new job in the spring where I will also be W2 employee but will not have access to 401k for one year's time. In the interim, I have signed on as a PRN and will be getting paid via a 1099 form.

Would it be best to the 1099 money to fund a solo 401k? Can I contribute to a solo 401k without incorporating as a business as long as I have 1099 income? What are things I should consider? It could provide a 401k vehicle to roll money into from my current 401k if I need to move the money before I am eligible to participate in my new employer's 401k, but maybe that is not a big issue?

ExitStageLeft
Posts: 971
Joined: Sat Jan 20, 2018 4:02 pm

Re: 1099 income--Solo 401k or something else?

Post by ExitStageLeft » Sat Sep 08, 2018 1:20 pm

Fair warning: I'm a W2 employee and have no firsthand experience with a solo 401k.

That said, I think the solo 401k is generally the best choice for someone self-employed with no employees. The IRS has a very thorough summary of small business retirement plans: https://www.irs.gov/publications/p560

In case you are considering one of the other options, there is also a summary of rollover compatibility: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Edit to add: here's what the IRS says in Pub 560 about being self-employed
Self-employed individual.

An individual in business for himself or herself, and whose business isn't incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. See Common-law employee and Net earnings from self-employment , earlier.

In addition, certain fishermen may be considered self-employed for setting up a qualified plan. See Pub. 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed.

JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: 1099 income--Solo 401k or something else?

Post by JBTX » Sat Sep 08, 2018 1:40 pm

I have a solo 401k and it has been pretty easy to use. If you are going back and forth between employment remember you can only put a total of $18.5k of employee contributions between all plans in a year. If you are over 50 you can put in 24,500. But either way you can still put employer contributions in regardless up to approx 20% of self employment income.

You don't have to incorporate. I was a sole proprietor. The plan admistrstor probably will require you to get a separate tax ID with IRS (which has been very handy as it has facilitated opening business credit cards with large bonuses - I've probably received $4000 in business credit card and bank account bonuses in last 18 months ).

What ESL said above is true, just because you are paid 1099 doesn't mean you arent effectively an employee, but practically most of the risk is on the "employer". As long as you and employer are good with the arrangement there is likely little risk for you. I've worked on and off that way for years.

I have a vanguard solo 401k and have found it easy to use. It doesn't have access to admiral funds which frustrates some but if you don't have large amounts in there that is pretty immaterial. If you plan to employ wife or kids then vanguard may not be your best bet because I've been told their plan paperwork does not accommodate it.

Spirit Rider
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Re: 1099 income--Solo 401k or something else?

Post by Spirit Rider » Sat Sep 08, 2018 3:27 pm

JBTX wrote:
Sat Sep 08, 2018 1:40 pm
I have a vanguard solo 401k and have found it easy to use. It doesn't have access to admiral funds which frustrates some but if you don't have large amounts in there that is pretty immaterial. If you plan to employ wife or kids then vanguard may not be your best bet because I've been told their plan paperwork does not accommodate it.
Vanguard will accommodate a spouse, but not any other employees including your children. And then there is the no rollovers restriction.

TwstdSista
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Re: 1099 income--Solo 401k or something else?

Post by TwstdSista » Sat Sep 08, 2018 3:33 pm

I'd recommend a solo 401k, but maybe not at Vanguard (I believe they do not allow incoming rollovers).

Are the fees high in your current 401k? It might b worth it to simply leave the money there for the time being. You can decide whether to roll it into either the solo 401k or the new plan once you've seen the fees in the new 401k plan.

E5797
Posts: 25
Joined: Wed Feb 17, 2016 7:23 am

Re: 1099 income--Solo 401k or something else?

Post by E5797 » Sat Sep 08, 2018 4:21 pm

TwstdSista wrote:
Sat Sep 08, 2018 3:33 pm
I'd recommend a solo 401k, but maybe not at Vanguard (I believe they do not allow incoming rollovers).

Are the fees high in your current 401k? It might b worth it to simply leave the money there for the time being. You can decide whether to roll it into either the solo 401k or the new plan once you've seen the fees in the new 401k plan.
The group I am leaving is a small business which will the current partner and I will be closing down over the next year or two. Eventually the corporation will not exist, so I think I'm going to have to move the money somewhere. The fees are not high now, but unfortunately, I don't think I can park it there forever. That's why I thought maybe a solo 401k might be good bet--another option in case the 401k with the new job isn't great. I'm not really familiar with where you can open a solo 401k or what the fees generally are.

TwstdSista
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Joined: Thu Nov 16, 2017 4:03 am

Re: 1099 income--Solo 401k or something else?

Post by TwstdSista » Sat Sep 08, 2018 4:32 pm

Search solo 401k in the box at the upper right corner -- there are plenty of threads and lots of information.

I have a solo 401k at Fidelity, which I believe does allow incoming rollovers. Schwab, TD Ameritrade and several others have them, too. Some even have a Roth option, if that's of interest to you (Fidelity does not have a Roth option last I knew).

E5797
Posts: 25
Joined: Wed Feb 17, 2016 7:23 am

Re: 1099 income--Solo 401k or something else?

Post by E5797 » Sun Sep 09, 2018 12:00 pm

Thanks. So I think it does seem like a Solo 401k would be the best bet, if only to have another 401k lined up to roll over my money too if the new job doesn't actually work out next spring. That would still allow me easily to do backdoor Roth IRA contributions in the future. Perhaps I'll start with one of the mainstream 401k options like Fidelity, etc that would allow rollovers. If I decided I needed more options in the future, I could then have a custom 401k designed if I needed. But the key seems to be able to get another 401k account available now to have that option.

Will I need to have this account opened by the end of 2018? I've read about having to obtain an EIN number. How do I go about doing that?

nolesrule
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Joined: Thu Feb 26, 2015 10:59 am

Re: 1099 income--Solo 401k or something else?

Post by nolesrule » Sun Sep 09, 2018 12:14 pm

Information about applying for an EIN:

https://www.irs.gov/businesses/small-bu ... ein-online

feehater
Posts: 105
Joined: Fri Jul 14, 2017 10:14 am

Re: 1099 income--Solo 401k or something else?

Post by feehater » Sun Sep 09, 2018 1:51 pm

Yes, the account needs to be set up by 12/31 but can be empty at that point. You also are supposed to fill out a form by 12/31 declaring your employee contributions for 2018. (You keep that form for your own records.) However, the actual contributions don't have to be deposited until your tax deadline. Be careful not to make too much employer contribution until you know the exact profit on your schedule C

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