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.