Retirement Planning for 1099 Independent Contractors

May 3, 2021

If you are an independent contractor, you will receive a form 1099 instead of an employee who will receive a W-2 tax form. Real estate agents are an example of an independent contractor. W-2 employees usually have the advantage of matching contributions from their employer, which independent contractors do not have. Independent contractors must find a retirement account that helps them reach their retirement planning goals.

The SEP-IRA and Solo 401(k) are popular retirement savings options for independent contractors. The SEP-IRA is established and funded by a business that includes sole proprietorship. The SEP-IRA has a contribution limit of 25% of compensation or $57,000 annually, whichever is less. The contributions are deductible, and the account is tax-deferred. Distributions are treated as ordinary income and are subject to income tax. Early withdrawal penalties apply if the distribution is taken before the age of 59 ½.

The Solo 401(k) is available to the self-employed and their spouse and is subject to the same rules as a traditional 401(k). You can contribute up to $19,500, and if you are 50 or older, you can contribute an additional $6,000 for a catch-up contribution each year. Then, as the employer (business owner), you can contribute up to 25% of your compensation each year with a maximum of $57,000 in combined contributions. If you are over 50, then $63,000 is the maximum.

If you are an independent contractor and would like help in planning your retirement and seeing which account best meets your goals, I would be happy to help. Finding the right retirement account for you is just one step in your plan. I can help you create your individualized financial plan.

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