Optimal location for 1099 earnings for retirement

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dan7800
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Joined: Wed Apr 07, 2021 5:49 am

Optimal location for 1099 earnings for retirement

Post by dan7800 »

I make about 1,000 - 2,000 a year 1099 earnings, and I would like to put as much away as possible for retirement while minimizing my current tax hit. I already max my Roth and 401k contribution each year from W2 profits. I've been contributing to a separate SEP-IRA.

1) Are there any other suggestions other than a SEP IRA that I can do to maximize the amount I am putting into a tax advantaged plan?
2) At 40, I assume that the most I can contribute to my SEP IRA is $223

Thanks all
-Dan
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GMCZ71
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Re: Optimal location for 1099 earnings for retirement

Post by GMCZ71 »

Other choices might be:
high interest debt.
I-bonds if income is low enough they are tax defer.
taxable brokerage so you can tax loss or gain harvest
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aristotelian
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Re: Optimal location for 1099 earnings for retirement

Post by aristotelian »

Solo 401k is superior to SEP. You can make the same employer contributions (20% of net profit) but can also make up to $20,500 individual contributions of every dollar earned. For example, if you did not like your W2 401k options, this would allow you to contribute your full 1099 net earnings to the Solo 401k while contributing less to your W2 401k. Solo 401k also does not interfere with backdoor Roth whereas SEP is subject to the pro rata rule. This is a good calculator https://obliviousinvestor.com/solo-401k ... alculator/
aristotelian
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Re: Optimal location for 1099 earnings for retirement

Post by aristotelian »

GMCZ71 wrote: Tue Jan 25, 2022 6:50 am Other choices might be:
high interest debt.
I-bonds if income is low enough they are tax defer.
taxable brokerage so you can tax loss or gain harvest
None of those offer tax deferral (I Bonds interest is tax deferred but the contributions are not). I would certainly prioritize Solo 401k over any of the above for anyone in the 22% bracket or higher.
Topic Author
dan7800
Posts: 390
Joined: Wed Apr 07, 2021 5:49 am

Re: Optimal location for 1099 earnings for retirement

Post by dan7800 »

aristotelian wrote: Tue Jan 25, 2022 7:06 am Solo 401k is superior to SEP. You can make the same employer contributions (20% of net profit) but can also make up to $20,500 individual contributions of every dollar earned. For example, if you did not like your W2 401k options, this would allow you to contribute your full 1099 net earnings to the Solo 401k while contributing less to your W2 401k. Solo 401k also does not interfere with backdoor Roth whereas SEP is subject to the pro rata rule. This is a good calculator https://obliviousinvestor.com/solo-401k ... alculator/
So for 2022, I could contribute $1,000 from my 1099 and $19,500 to my 403b to equal the max $20,500? I have great 403b options.

I'm leaning against this since it would require coordinating limits with my employer.
Topic Author
dan7800
Posts: 390
Joined: Wed Apr 07, 2021 5:49 am

Re: Optimal location for 1099 earnings for retirement

Post by dan7800 »

GMCZ71 wrote: Tue Jan 25, 2022 6:50 am Other choices might be:
high interest debt.
I-bonds if income is low enough they are tax defer.
taxable brokerage so you can tax loss or gain harvest
I'm already going to max out my ibonds for 2022. I am contributing regularly to my taxable account, but I'd like to do what I can to decrease my current tax hit.
aristotelian
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Joined: Wed Jan 11, 2017 7:05 pm

Re: Optimal location for 1099 earnings for retirement

Post by aristotelian »

dan7800 wrote: Tue Jan 25, 2022 9:23 am
aristotelian wrote: Tue Jan 25, 2022 7:06 am Solo 401k is superior to SEP. You can make the same employer contributions (20% of net profit) but can also make up to $20,500 individual contributions of every dollar earned. For example, if you did not like your W2 401k options, this would allow you to contribute your full 1099 net earnings to the Solo 401k while contributing less to your W2 401k. Solo 401k also does not interfere with backdoor Roth whereas SEP is subject to the pro rata rule. This is a good calculator https://obliviousinvestor.com/solo-401k ... alculator/
So for 2022, I could contribute $1,000 from my 1099 and $19,500 to my 403b to equal the max $20,500? I have great 403b options.

I'm leaning against this since it would require coordinating limits with my employer.
Yes, with Solo 401k that would work. Could do $2,000/$18,500 etc depending on your 1099 income. The other question would be whether you would give up any employer match.
middistancerunner
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Re: Optimal location for 1099 earnings for retirement

Post by middistancerunner »

dan7800 wrote: Tue Jan 25, 2022 9:23 am
aristotelian wrote: Tue Jan 25, 2022 7:06 am Solo 401k is superior to SEP. You can make the same employer contributions (20% of net profit) but can also make up to $20,500 individual contributions of every dollar earned. For example, if you did not like your W2 401k options, this would allow you to contribute your full 1099 net earnings to the Solo 401k while contributing less to your W2 401k. Solo 401k also does not interfere with backdoor Roth whereas SEP is subject to the pro rata rule. This is a good calculator https://obliviousinvestor.com/solo-401k ... alculator/
So for 2022, I could contribute $1,000 from my 1099 and $19,500 to my 403b to equal the max $20,500? I have great 403b options.

I'm leaning against this since it would require coordinating limits with my employer.
OP, you sound like you are in the same situation as me (1099 side income, a great 403b at work). You can make employee and employer contributions to a solo 401k. Like me, it sounds like you should prefer to make your employee contributions (2022 max $20,500) in your 403b and not to the solo 401k. This is for a bunch of reasons including the fact that the marginal benefit of solo 401k contributions is lower than your marginal tax rate (and thus the value of your 403b contributions) because of the reduction in the QBI deduction that deducting for a solo 401k usually causes. So in your 403b you save your marginal tax rate from a contribution, and in your solo 401k you save 0.8*marginal tax rate from a contribution. Also, for me, in my home state of Massachusetts, I get to deduct 403b contributions but not solo 401k contributions, another reason to prefer the 403b. YSMV (your state may vary)

However, you can make Solo 401k contributions as the employer from your 1099 earnings. Depending on your details, you will be able to deduct around 20% of your $1,000-$2,000 earnings. I find this https://obliviousinvestor.com/solo-401k ... alculator/ calculator helpful. This isn't going to be a lot of money, and you can see a couple of threads in my history where I basically opened up a 401k for earnings of a similar amount and then never actually contributed because it was logistically a little daunting :oops:

To give you a sense, last year I had $1,000 in 1099 income and after the simplified home office deduction and one business expense what was left was an allowable employer solo 401k contribution of $17. lol. Because of how tax rounding works, I save literally nothing on my taxes by doing this deduction.

Next year I'll have ~$11,000 in self employment income so I'm actually planning on using my empty solo 401k for the first time :happy

TL;DR - with only a small amount of side income, and a good 403b you are maxing out at work, the most you can probably put into a solo 401k every year will be $100-$400. It may not be worth the paperwork hassle to do this.
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