Are you a 1099 worker or self-employed? Know about your retirement plans

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By: tiarajoseph11
on 27th Jan,2017

Learn the ways of planning for your retired life earlier being a self-employed individual.

As per the study by the Freelancers Union and Elance-oDesk 2014, 53 million Americans are working as freelancers. And through freelancing, the workforce is also adding 475 billion to the US economy. However, most of the independent contractors or 1099 employees are curious about their saving option for the future. Many 1099 workers think that they lack access to good retirement plans to secure their post-retirement days. However, this is a myth. 1099 workers also have many options for saving their hard-earned money and get the best benefit to secure their future.

Moreover, a survey conducted by TD Ameritrade in 2001 revealed that the percentage of self-employed people who saved for retirement are merely 40% of the total self-employed people.

Self-employed people normally provide some valid reasons for not contributing towards retirement savings.The most common of them are:

  • Not having a fixed earning
  • Regular debt payments
  • Expenses towards health care
  • Cost of education
  • Business expenses

But, as you alone need to prepare yourself for the long retirement life, you must also take care of the investment. For that, you must live frugally and save enough while you’re still employed.

However, you need to overcome this mentality and start investing for your retirement. To do so, you need to know about available retirement plans so that you can select the best one for you.

What are those plans?

To know them in detail, you need to read the entire article carefully.

A. Individual or solo 401(k)

1099 workers or those who are independent contractors can go for solo 401(k) account. The Solo 401(k) plan is special for sole proprietors, along with their spouse only. This investment plan is not suitable for you if you also have employees working under your company’s name.

If you’re planning to contribute more than $50,000 a year, then a solo 401(k) account will be best for you to save money for securing retirement days. The IRS allows up to $17,000 for annual contributions and additional 20% of business income, capped at $50,000.

If you’re 50 or older and self-employed, then you can contribute $22,500, and 25% of business income, also capped at $50,000. Buy a solo 401(k) cost a big amount of money to set up and to maintain. And, you need to file a tax return once your account exceeds $250,000.

You need to keep that investment account intact until you reach 59.5 years. There are several exceptions also:

  • While purchasing your first home, you can use Solo 401(k) plans
  • If you face disability anyhow
  • If you need sudden money for your education purpose

Read more: Retirement Plans for Self-Employed People

B. SEP (Simplified Employee Pension) IRA

SEP IRA is quite simple and handy to activate and maintain. SEP plan is free and less costly than 401(k). This retirement investment option is best fit for both business persons (with their employees) and self-sufficient entrepreneurs. With the SEP IRA option, only the employer is entitled to provide the money, not the employee.

Independent contractors can contribute 25% of their income. It’s similar to a traditional IRA. Remember, your contributions are tax deductible. The SEP IRA is easy to build and manage. It allows a 1099 worker to save money for retirement years for themselves as well as their employee. However, as an employer, 1099 workers should contribute the same percentage of their employee's plans besides their own plan. For instance, if a 1099 worker has employees and contributes 12% of income to his/her plan, then as an employer, he/she should also contribute the same percent of his employee's income to the employees plan.
Ten percent penalty will be charged against your account along with taxes if you anyhow withdraw an amount from your SEP IRA investment account before you reach at least 59.5 years.

C. Simple IRA

Sometimes, opening a solo 401(k) and a defined benefits plan becomes difficult for many 1099 workers. Thus, a simple IRA can be their best option. If you can contribute more than 15 percent of your income, then go for simple IRA for saving money. It’s very affordable to set up and maintain. It allows for low contributions up to $12,5000, and up to 3 percent of salary. If the contributor’s age is 50 or older, then he/she is allowed to contribute $15,500. If you’re a business owner and have 100 or fewer employees, then its the best option for you.


My Retirement Account or MYRA has launched very recently, in November 2015. This plan is especially for those workers who don't have access to the employer favored retirement plans. 1099 employees can easily open an account at MYRA, and there are no fees entitled with the account. Your investment will be safe as it’ll be backed by the Treasury Department. Most importantly you can withdraw your savings without tax or penalty at any time. However, the interest can be withdrawn at 591/2 or under terms and conditions.

Crafting a budget and saving is important

As per the study by Ameritrade, 7 in 10 self-employed persons have no retirement savings. This is very unfortunate that a person who can work solely is not capable of saving the hard earned money to secure the retirement days. However, the key is budgeting and saving a portion of income. If you’re a sole proprietor, an individual contractor, a freelancer or a 1099 employee, then you may not have a proper paycheck basis income, insurance or many financial programs that others have. But, that doesn’t mean you have to work forever to secure your retirement. All you need to do is craft a budget as per the last three months income. Try to set an automatic deduction to set aside money for an emergency fund, health insurance premiums and other important accounts including retirement account. Thus, you can save money without even knowing about it.

Final thoughts

According to the financial advisors, people, who’re newly self-employed and decades away from retirement, should set aside at least 10-20 percent of their income to reduce the chances of working for long. It is also advisable to contact a financial advisor before making any investment.

See also: Financial strategies for a self employed person to retire debt free

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