Contractor (1099) Worker -- 401k and Health Insurance

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jeffreys
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Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

I have the potential of becoming a contractor for my current employer trading my W2 for a 1099. I'm considering doing this in 2025 due to the following:

My spouse carries health insurance which my employer does not offer. He wants to retire which means we'll have to purchase insurance via the ACA. By me being a contractor, we'll be able to deduct our health insurance premiums. Related question -- is there a strategy for what sort of plan we should choose on the Marketplace? Namely, should we consider higher premium plans with lower deductibles since we can deduct the premiums but not the out-of-pocket expenses? This might eliminate HDP with HSA which we currently have through his employer and has worked well for us.

My IRA with Vanguard currently has non-deductible contributions which means we file an 8606 form each year as we do Roth conversions in hopes of "cleaning" it up. It feels like we'll never get there since it keeps growing (a good problem to have). By opening a Solo 401k as a contract worker that would allow me to transfer the tax-deferred portion of my IRA to the Solo 401k and get that mix of sources cleaned up. Am I thinking about this properly and is Vanguard's Solo 401k a good option?
BogleTaxPro
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by BogleTaxPro »

jeffreys wrote: Mon Jul 08, 2024 9:57 am I have the potential of becoming a contractor for my current employer trading my W2 for a 1099. I'm considering doing this in 2025 due to the following:

My spouse carries health insurance which my employer does not offer. He wants to retire which means we'll have to purchase insurance via the ACA. By me being a contractor, we'll be able to deduct our health insurance premiums. Related question -- is there a strategy for what sort of plan we should choose on the Marketplace? Namely, should we consider higher premium plans with lower deductibles since we can deduct the premiums but not the out-of-pocket expenses? This might eliminate HDP with HSA which we currently have through his employer and has worked well for us.

My IRA with Vanguard currently has non-deductible contributions which means we file an 8606 form each year as we do Roth conversions in hopes of "cleaning" it up. It feels like we'll never get there since it keeps growing (a good problem to have). By opening a Solo 401k as a contract worker that would allow me to transfer the tax-deferred portion of my IRA to the Solo 401k and get that mix of sources cleaned up. Am I thinking about this properly and is Vanguard's Solo 401k a good option?
Vanguard is transferring their Solo 401K's to Ascensus. Read first post in this topic for alternatives: viewtopic.php?t=429947
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jeffreys
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

BogleTaxPro wrote: Mon Jul 08, 2024 10:12 am Vanguard is transferring their Solo 401K's to Ascensus. Read first post in this topic for alternatives: viewtopic.php?t=429947
I'm aware of this and I probably should have made my original post a little more generic stating I want to open a Solo 401k for the reason I listed and not so much WHO I should open it with.
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MP123
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by MP123 »

jeffreys wrote: Mon Jul 08, 2024 9:57 am By opening a Solo 401k as a contract worker that would allow me to transfer the tax-deferred portion of my IRA to the Solo 401k and get that mix of sources cleaned up. Am I thinking about this properly
Yes, you can "pour off" the pre-tax contributions from the IRA into the Solo 401k, leaving the non-deductible basis behind. Then convert that basis to Roth IRA without having to deal with prorating the pre/post tax mix of funds in the IRA. This is a good approach.

I think most of the solo401k providers do allow incoming rollovers from IRAs (instead of just 401ks), but worth checking to be sure before you open one. Vanguard did not allow this until very recently, and now is exiting the market, of course.
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by 123 »

MP123 wrote: Mon Jul 08, 2024 10:36 am ...I think most of the solo401k providers do allow incoming rollovers from IRAs (instead of just 401ks), but worth checking to be sure before you open one...
From the browsing research I've done it seems like solo401k providers may not include features (like rollover or Roth options) you might consider useful in their basic plan. But often those features are available in a custom plan which may cost significantly more, either as an initial plan set-up and/or ongoing fee.
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Artful Dodger
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by Artful Dodger »

jeffreys wrote: Mon Jul 08, 2024 9:57 am I have the potential of becoming a contractor for my current employer trading my W2 for a 1099. I'm considering doing this in 2025 due to the following:

My spouse carries health insurance which my employer does not offer. He wants to retire which means we'll have to purchase insurance via the ACA. By me being a contractor, we'll be able to deduct our health insurance premiums. Related question -- is there a strategy for what sort of plan we should choose on the Marketplace? Namely, should we consider higher premium plans with lower deductibles since we can deduct the premiums but not the out-of-pocket expenses? This might eliminate HDP with HSA which we currently have through his employer and has worked well for us.

My IRA with Vanguard currently has non-deductible contributions which means we file an 8606 form each year as we do Roth conversions in hopes of "cleaning" it up. It feels like we'll never get there since it keeps growing (a good problem to have). By opening a Solo 401k as a contract worker that would allow me to transfer the tax-deferred portion of my IRA to the Solo 401k and get that mix of sources cleaned up. Am I thinking about this properly and is Vanguard's Solo 401k a good option?
I'll skip the 401K questions as you've already got some replies.

You can certainly buy a richer plan and deduct the premiums. However, you can also continue buying a HSA compliant high deductible health plan. Contributions to the HSA are deductible and you can reimburse any eligible expenses from your new HSA or even from your older existing HSA.
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jeffreys
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

I'll likely be choosing Fidelity for my Solo 401k.

It looks like this is where I start to move a portion of my mixed source IRA with Vanguard to the Solo 401k: https://www.fidelity.com/customer-servi ... fer-assets

Further, it looks like once I'm going through this process I'll specify the amount I want to transfer from my Vanguard IRA. As far as the amount to transfer, say the traditional IRA has a total balance of $100k and the post/after-tax portion is $20k. That means I should transfer a maximum of $80k and then do a Roth conversion in Vanguard on the remaining $20k. Am I getting that right?

And finally, (dumb question?) do I actually need to be a contractor to open a Solo 401k and do the rollover? Could I just open it with the restriction I can't do any contributions since I don't have any 1099 income? The tentative plan is I'll be a 1099 employee starting in January, but if I can open it now and do the rollover, I could clean up the pro-rata mess in 2024.
Pete3
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by Pete3 »

I'm just impressed that this thread has lasted one day without anyone lecturing that changing from W2 to 1099 in not a choice and bringing up the IRS rules on whether you are really a contractor or not.

Anyway, as a 20+ year 1099 contractor who had a Fidelity Solo 401k and a purchased a HDP with HSA from the ACA - everything you said makes sense to me. The point another poster made about the lower (deductible) premiums being offset by the fact that your HSA contributions are tax deductible are on point. We have managed to build up quite a bit of money in our HSA accounts so unless you have known conditions or other medical reasons to stick with traditional plans, I would recommend the HDP/HSA route.
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jeffreys
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

Pete3 wrote: Tue Jul 09, 2024 10:12 am I'm just impressed that this thread has lasted one day without anyone lecturing that changing from W2 to 1099 in not a choice and bringing up the IRS rules on whether you are really a contractor or not.
Ha, me too. For more context, I'm a web developer for a very small company that employs both W2 and 1099 employees. I have the option of being either. Since my employer has been employing both, I trust that he knows the guidelines and will advise me appropriately when/if I want to make the change.
sailaway
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by sailaway »

jeffreys wrote: Tue Jul 09, 2024 8:35 am

And finally, (dumb question?) do I actually need to be a contractor to open a Solo 401k and do the rollover? Could I just open it with the restriction I can't do any contributions since I don't have any 1099 income? The tentative plan is I'll be a 1099 employee starting in January, but if I can open it now and do the rollover, I could clean up the pro-rata mess in 2024.
There has to be a sponsoring business. Definitely best to wait until you have the 1099 income. Opening a formal business without that income might require local licensing fees, etc.
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jeffreys
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

sailaway wrote: Tue Jul 09, 2024 10:52 am
jeffreys wrote: Tue Jul 09, 2024 8:35 am

And finally, (dumb question?) do I actually need to be a contractor to open a Solo 401k and do the rollover? Could I just open it with the restriction I can't do any contributions since I don't have any 1099 income? The tentative plan is I'll be a 1099 employee starting in January, but if I can open it now and do the rollover, I could clean up the pro-rata mess in 2024.
There has to be a sponsoring business. Definitely best to wait until you have the 1099 income. Opening a formal business without that income might require local licensing fees, etc.
Is the sponsoring business "my" business (like Jeffrey's Web Development) or the company I'm doing the work for (my current company now employing me as a 1099 employee)?
Pete3
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by Pete3 »

jeffreys wrote: Tue Jul 09, 2024 10:47 am
Pete3 wrote: Tue Jul 09, 2024 10:12 am I'm just impressed that this thread has lasted one day without anyone lecturing that changing from W2 to 1099 in not a choice and bringing up the IRS rules on whether you are really a contractor or not.
Ha, me too. For more context, I'm a web developer for a very small company that employs both W2 and 1099 employees. I have the option of being either. Since my employer has been employing both, I trust that he knows the guidelines and will advise me appropriately when/if I want to make the change.
Uh oh, with that explanation you are definitely going to hear from the "its not a valid choice" crowd. :happy

I was in IT too, working side by side with full-time employees in a so-called 'staff augmentation' position for many years acting just like an employee except no reviews and paid hourly. Apparently I was lucky that no one ever called the IRS on my employer (/s)

Assuming that your employer is offering you a 1099 rate that covers the difference in self-employment taxes (and lost benefits, if any) then its a good move (not that you asked)
sailaway
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by sailaway »

jeffreys wrote: Tue Jul 09, 2024 10:59 am
sailaway wrote: Tue Jul 09, 2024 10:52 am
jeffreys wrote: Tue Jul 09, 2024 8:35 am

And finally, (dumb question?) do I actually need to be a contractor to open a Solo 401k and do the rollover? Could I just open it with the restriction I can't do any contributions since I don't have any 1099 income? The tentative plan is I'll be a 1099 employee starting in January, but if I can open it now and do the rollover, I could clean up the pro-rata mess in 2024.
There has to be a sponsoring business. Definitely best to wait until you have the 1099 income. Opening a formal business without that income might require local licensing fees, etc.
Is the sponsoring business "my" business (like Jeffrey's Web Development) or the company I'm doing the work for (my current company now employing me as a 1099 employee)?
The former. When you set up the 401k you will need an EIN from the IRS.
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jeffreys
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by jeffreys »

Pete3 wrote: Tue Jul 09, 2024 11:02 am
jeffreys wrote: Tue Jul 09, 2024 10:47 am
Pete3 wrote: Tue Jul 09, 2024 10:12 am I'm just impressed that this thread has lasted one day without anyone lecturing that changing from W2 to 1099 in not a choice and bringing up the IRS rules on whether you are really a contractor or not.
Ha, me too. For more context, I'm a web developer for a very small company that employs both W2 and 1099 employees. I have the option of being either. Since my employer has been employing both, I trust that he knows the guidelines and will advise me appropriately when/if I want to make the change.
Uh oh, with that explanation you are definitely going to hear from the "its not a valid choice" crowd. :happy

I was in IT too, working side by side with full-time employees in a so-called 'staff augmentation' position for many years acting just like an employee except no reviews and paid hourly. Apparently I was lucky that no one ever called the IRS on my employer (/s)

Assuming that your employer is offering you a 1099 rate that covers the difference in self-employment taxes (and lost benefits, if any) then its a good move (not that you asked)
Perhaps I'm making an assumption that he knows what he's doing offering me the option to work as a contractor. We do have another contractor who works 4 days a week. I'm unsure if that is a condition of his 1099 arrangement or not. Also, we all work remotely. There is no physical office to report to.

Are there any questions I should be asking my employer to make sure I can legitimately be a 1099 employee?
Pete3
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Re: Contractor (1099) Worker -- 401k and Health Insurance

Post by Pete3 »

jeffreys wrote: Tue Jul 09, 2024 11:12 am
Pete3 wrote: Tue Jul 09, 2024 11:02 am
jeffreys wrote: Tue Jul 09, 2024 10:47 am
Pete3 wrote: Tue Jul 09, 2024 10:12 am I'm just impressed that this thread has lasted one day without anyone lecturing that changing from W2 to 1099 in not a choice and bringing up the IRS rules on whether you are really a contractor or not.
Ha, me too. For more context, I'm a web developer for a very small company that employs both W2 and 1099 employees. I have the option of being either. Since my employer has been employing both, I trust that he knows the guidelines and will advise me appropriately when/if I want to make the change.
Uh oh, with that explanation you are definitely going to hear from the "its not a valid choice" crowd. :happy

I was in IT too, working side by side with full-time employees in a so-called 'staff augmentation' position for many years acting just like an employee except no reviews and paid hourly. Apparently I was lucky that no one ever called the IRS on my employer (/s)

Assuming that your employer is offering you a 1099 rate that covers the difference in self-employment taxes (and lost benefits, if any) then its a good move (not that you asked)
Perhaps I'm making an assumption that he knows what he's doing offering me the option to work as a contractor. We do have another contractor who works 4 days a week. I'm unsure if that is a condition of his 1099 arrangement or not. Also, we all work remotely. There is no physical office to report to.

Are there any questions I should be asking my employer to make sure I can legitimately be a 1099 employee?
Honestly not your problem and I wouldn't bother them about it.

If someone complains and the IRS retroactively forces them to reclassify you as an employee that just means your employer will owe for the half FICA taxes you've been paying while filing as a 1099. I've never heard of any contractor get in trouble for being misclassified, its all on the employer AFAIK.
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