Retirement Savings Options for 1099 Workers Explained Simply
Being a form 1099 worker can be so much responsibility and require a bit of tenacity too sometimes. I often have to scroll through paragraphs of information on the envied W-2 employee to get to one little sentence dashed off about what might work as retirement savings options for the 1099 worker.
Especially annoying is if you’re on the 1099 in the first place because your employer is a shady human and trying to get out of paying his or her half of your medicare and social security taxes. Hopefully, though, that is not your situation and you are a happily self-employed individual/independent contractor/whatever.
Anyways, today I’d like to discuss some retirement savings options for 1099 workers, an often overlooked group of people. (And I suppose for any other person as well, these options aren’t exclusive to individuals issued a 1099.)
There are many types of retirement savings plans for 1099 workers out there today, but I am not really going to address any of the employer sponsored plans today. This article is really going to be geared towards options for the self-employed individuals, small business owners, part time seasonally employed farm workers, etc. (But if you’ve got yourself set up in a niceee retirement savings plan with company match, congratulations on hitting that motherload!)
(I am also assuming that you have a general idea on how stocks and the stock market work. If you need a basic summary check out my article on stocks and basic investing here.)
Ok, let’s start with IRAs!
Individual retirement accounts (or IRAs)
IRAs are retirement savings accounts that can be set up through whatever financial institution you pick, and contributions to the account can be invested in types of securities (like stocks, mutual funds, and etc.).
Types of IRAs
As with anything with our government, there are exactly one million limitations and contribution maximums and restrictions and exceptions with all these IRAs. The best advice I have is to look up your specific circumstance and find your unique rules. (If you’re young and making less than $118,000/year, the maximum annual contribution limit for a Traditional or Roth IRAs is $5,500.) I don’t want to just throw a ton of irrelevant numbers and rules at you, so I’m going to generally describe each IRA in hopes to get you started thinking about what might be a good option for you.
- Traditional IRA
- Tax deductible for some or all contributions
- Your money grows here tax free and you only pay taxes (at ordinary income tax rates) when you withdraw the money.
- You must be under age 70 ½ to contribute
- You must start withdrawing by age 70 ½
- 10% penalty on amount withdrawn early in addition to tax you will also owe unless you qualify for exceptions (like being a first time homebuyer)
- Roth IRA
- Not tax deductible
- Your money grows here tax free and you pay no taxes upon withdrawal.
- You can contribute at any age
- You are never required to withdraw any money
- As long as it hasn’t been converted from a traditional IRA, then you can withdraw penalty-free as long as you don’t withdraw any earnings
- Spousal IRA
- Can be a traditional or roth IRA
- It’s exactly what it sounds like: an IRA set up to allow a nonworking spouse to accrue tax advantaged retirement savings.
- Whatever IRA contribution limits apply to the working spouse will also apply to this account.
- Must file a joint tax return to be eligible
- Simplified Employee Pensions (SEP) IRA
- For self-employed individuals (like independent contractors) and small business owners
- If a small business owner sets up a SEP IRA for his or herself and/or for employee(s), he or she can deduct contributions from his or her reported income (and potentially score a lower tax bracket)
- All SEP IRA contributions are made by the employer, the employee cannot make contributions
- Employees pay taxes when they withdraw the money
- Typically for small businesses with 100 or less employees
- Savings Incentive Match Program for Employees (SIMPLE) IRA
- Also for small business owners and self-employed individuals
- Also a plan a business owner can set up for him or herself and/or his or her employee(s) and make contributions to
- Employees can contribute
- For any size business
- Less flexible options of how an employer can contribute compared to a SEP IRA
- Rollover (conduit) IRA
- For when you want to move money from one retirement savings account (like a 401(k) at your job) into an IRA
- Usually used by people who are leaving their job
- Usually in the form of a Traditional IRA, but could be a Roth IRA, in which case you’d have to pay taxes during the rollover
- Inherited IRA
- Can be a Roth or Traditional IRA
- Just what it sounds like: you inherited this IRA from someone who is deceased
- Education IRA
- An IRA set up to help a beneficiary pay for education costs
- Not tax-deductible
- Deposits and earnings can be withdrawn tax-free if used to pay for higher educated costs!
- Payroll deduction IRA
- Can be Traditional or Roth IRA
- Just what it sounds like: an IRA that is set up to be funded with contributions from an employee’s paycheck
- Group IRA or Employer and Employee Association Trust Account
- Traditional IRA
- Set up by employer, unions, and other employer associations for employees/members
- Individual Retirement Annuity
- Can be a Roth or Traditional IRA
- Set up with a life insurance company with the purchase of a special annuity contract
And bonus IRA!
- myRA, a term you may stumble across since its demise was fairly recent
- Operated similarly to a Roth IRA
- Set up in 2014 under the Obama administration for lower income individuals who didn’t have a lot of retirement savings and may not have been offered a retirement plan by their employer
- It has since been discontinued by the Trump administration
Traditional vs Roth IRA
This is going to come down to a little guesswork on your part. I’m assuming the special notes I’ve mentioned above don’t make much a difference swaying you one way or another (like you’re not age 95 and therefore already excluded from contributing to a traditional), it comes down to: do you want to pay taxes now or later? If you’re like me and you’re in a low tax bracket right now, but you are hopeful that when it’s time to retire, you will be in a much higher tax bracket, then you should go with a Roth IRA.
Read more here on Roth vs Traditional IRAs .
Other Retirement Savings Options for 1099 Workers
- Solo 401(k)
- As it suggests, it differs from the general employer based 401 (k) in that this is only for a sole business owner and his or her spouse
- Contribution limits based on income of up to $18,000/year make it more flexible to contribute than Traditional and Roth IRAs
- Roth solo 401(k)
- Combines features of a Roth IRA with a 401(k), offering tax free withdrawals with high contribution limits
- Withdrawals are tax free
- Keogh Plan
- Generally contributions are tax deductible
- Two types of plans:
- Qualified defined-benefit
- Qualified defined-contributions
- Withdrawals must begin by age 70 ½
- May have high upkeep costs
- Not very popular, in general
- Profit sharing plans: plans that give employees a share of the profits of the company, can be applied to many of the plans mentioned, i.e. you make profit sharing contributions to your solo 401(k).
So, there you have it. Hope I haven’t completely overwhelmed you with more options than you even knew you had. I aimed to give you a good start though thinking about retirement and what you need to start doing today to get ready for the future tomorrow.