1099 contractor- 401K or IRA? The better vehicle to use for a tax shelter retirement account?

Over at mrmoneymustache.com we read the following discussion: Author Topic: 1099 contractor- 401K or IRA?  (Read 146 times)

MPRSearch

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• Posts: 2

1099 contractor- 401K or IRA?

« on: January 20, 2014, 07:59:07 am »

First time poster here and have a question for the group. Does anyone have any thoughts on what would be a better vehicle to use for a tax shelter retirement account?

Let me add a little more here: I had a great year and am paying a lot to uncle sam. I am looking for the best possible retirement vehicle I can still use that would count towards last years taxes.

« Last Edit: January 20, 2014, 08:24:01 am by MPRSearch » Logged

serpentstooth

• Magnum
• Posts: 369

Re: 1099 contractor- 401K or IRA?

« Reply #1 on: January 20, 2014, 08:12:18 am »

Quote from: MPRSearch on January 20, 2014, 07:59:07 am

First time poster here and have a question for the group. Does anyone have any thoughts on what would be a better vehicle to use for a tax shelter retirement account?

An IRA is easier to set up and (at least through Vanguard if you have <$50,000 with them) cheaper. But if you're saving more than $5,500/annum, you'll need the 401k, if not both accounts. Logged

MPRSearch

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Re: 1099 contractor- 401K or IRA?

« Reply #2 on: January 20, 2014, 02:24:58 pm »

looks like I have 3 options. individual 401k, SIMPLE IRA and a SEP IRA. Anyone choose one over the others? Logged

Midwest

• Bristles
• Posts: 58

Re: 1099 contractor- 401K or IRA?

« Reply #3 on: January 20, 2014, 02:33:36 pm »

Sep allows up to $51k depending on compensation (see attached http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions).

Simple limits are much lower.

Are you sure you still have the 401k option since this is for last year?  Regardless, the limit on an individual 401k + p/s is similar to that of a SEP.  The big advantage to that over the SEP comes into play when using an S-Corp.  

Assuming you want to put significant $'s away or unless you are an S-corp, I'd look @ the SEP.

Midwest

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the fixer

• Senior Mustachian
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• Location: Seattle, WA

Re: 1099 contractor- 401K or IRA?

« Reply #4 on: January 20, 2014, 08:14:53 pm »

I use the SEP IRA. The individual 401(k) would let me shelter more money because I don't earn a ton per year, but I didn't want to deal with the extra work involved. Getting a SEP-IRA started with Vanguard is really easy.

Remember that the SEP-IRA's contribution limit for self-employed individuals is 20% of your income, which is 25% after accounting for the self-employment tax deduction or some such adjustment. It's easy to screw this up because a lot of sources say the limit is 25%, but this doesn't apply exactly to the self employed. Logged

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Cheddar Stacker

• Bristles
• Posts: 69
• Location: St. Louis

Re: 1099 contractor- 401K or IRA?

« Reply #5 on: January 20, 2014, 09:13:58 pm »

SEP IRA will likely give you the most available money to shelter depending on your income. As the fixer said, it's 20% of self employed net income. If you only made $20K it will be lower than a SIMPLE IRA would allow. If you made $250K net, you can do up to the $50K limit for all tax deferred vehicles. My numbers aren't perfect, but it should give you an idea of how powerful the SEP IRA is vs. the others. I think the SIMPLE IRA is limited to $12K/year, but not positive on that one. Logged