Q. I am starting a new position as an independent contractor. My former employer had a 401(k). I want to continue to save for retirement, but I’m not sure how to do it without that 401(k). How can an independent contractor continue to save for retirement?
A. Good news! There are many advantages of being self-employed when it comes to saving for retirement. As an independent contractor (ie, paid on a 1099 instead of a W-2), you are considered to be running your own business. Just like your employer gets to pick the benefits it offers, you now get to choose (and pay for) your own benefits. While you will no longer get a 401(k) match from the employer, you are also no longer limited by the employer’s contribution limits, plan fees, or often poor investment options.
The mainstay of retirement saving for an independent contractor should be an individual 401(k), sometimes called a solo 401(k). These plans allow you to make an $18,500 “employee” contribution ($24,500 if older than age 50) and then make “employer” contributions of 20 percent of your net income up to the plan contribution limit of $55,000. While you only get one employee contribution no matter how many jobs or 401(k)s you have, the $55,000 limit is a per-plan limit. That means if you have an employee job with a 401(k) and do some work as an independent contractor, you can still open an individual 401(k) and just contribute the employer contribution to it.
Solid individual 401(k) plans can be easily opened at any of the large mutual fund or brokerage companies such as Vanguard, Fidelity, Charles Schwab, eTrade, or TD Ameritrade. While all of these plans are good plans with diversified, low-cost investments available, some plans offer features that others do not. For example, Vanguard doesn’t allow IRAs to be rolled into their plan. Fidelity and Charles Schwab don’t offer a Roth 401(k) option. eTrade and TD Ameritrade charge (admittedly low) commissions to buy and sell many mutual funds and exchange-traded funds.
Be sure the plan you choose has the features you need, such as Roth contributions, IRA rollovers, or 401(k) loans. You will also need to get an Employee Identification Number from the IRS to open an individual 401(k), but this is free and only takes a few minutes online. You do not need to form an LLC or corporation to use an individual 401(k). By virtue of receiving a 1099, you are automatically a sole proprietor, and that is enough to start a plan.