1099 Retirement Options

[fiscallynaive]

4th year EM res that recently signed as an IC

No kids, single

What are my retirement account options? Not sure if helpful, but salary will range from 450-550k

Also, how does taxation work if I travel for work? I do not reside in the states I will be working. Do I pay state taxes on income made in that particular state?

 

Thanks,

Totally clueless

 

[ENT Doc]

fiscallynaive wrote:

4th year EM res that recently signed as an IC

No kids, single

What are my retirement account options? Not sure if helpful, but salary will range from 450-550k

Also, how does taxation work if I travel for work? I do not reside in the states I will be working. Do I pay state taxes on income made in that particular state?

 

Thanks,

Totally clueless

 

Click to expand...

You can do an i401k and max that out with employee ($18,000) and employer (20% net income) contributions.  You will be able to get to the max contribution with that salary.  Backdoor Roth is the second thing.  Can't think of anything else since you're not an employee.  You'll pay the full FICA tax on your 1099 income (minus expenses) (up to Soc Sec limit and no limit for Medicare).  I would deduct everything and anything related to you carrying on in that business in other states.  Check on the specific travel and food deductions.  State licensure fee, MOC fee, DEA, lodging, etc. I imagine could be deducted.  You should pay taxes in the state you worked, but the 1099 may not specify.   I'm not sure what others do in that situation but I'd advise paying the taxes where the income was earned.  Your home state may give you a credit for paying in other states, but if their tax rate is higher you may owe more in your home state.  Check your home state tax forms to see.  The key with your situation is deductions.  Maximize them and spend most of your efforts in the next few months learning about them and how to maximize.  Obviously, if it's not something you wouldn't spend anyway don't do it for the deduction.  Is there an area you could set aside in your primary residence solely for this job?  Every little bit helps.

[DMFA]

Buy a high-deductible health plan and get an HSA

Start a defined-benefit plan. These are complicated and usually require a third-party administrator to manage appropriately.

Backdoor Roth is nice, but it's like 1% of your income...

After that, plain taxable brokerage account to put away up to 20-25% of your income. Use tax-efficient (low dividend, low turnover) funds to reduce the tax drag.

I know I'm probably splitting hairs, but try to avoid calling it a "salary" unless it's a fixed amount you're receiving at a fixed interval as an employee. It's not necessarily synonymous with income.

I'm sorry I don't know the answer to your state tax question, but if you are responsible for all the federal income, federal payroll, and state taxes on various 1099s and either don't have a firm grasp on the tax code or don't want to spend hours on it, hire an accountant.

[jfoxcpacfp]

fiscallynaive wrote:

4th year EM res that recently signed as an IC

No kids, single

What are my retirement account options? Not sure if helpful, but salary will range from 450-550k

Also, how does taxation work if I travel for work? I do not reside in the states I will be working. Do I pay state taxes on income made in that particular state?

Click to expand...

Congratulations on your new contract.

You will open a SOLO-401k and contribute up to $54k (should be no problem at that income level). Then, as @Ent_Doc said, you'll also contribute to a backdoor Roth IRA. Beyond that, a taxable account is a good option. In the future, if you remain on this trajectory, you can also start a Defined Benefit (DB) plan but no need to worry about that now.

You will owe taxes for the states you work in that have an income tax code. If you happen to live in a state with no income tax code, you will owe no taxes for work done in your state or for work done in states with no income tax code. If you live in a state with an income tax code and your state has an agreement (reciprocity) with another state with an income tax code, you will report the income in your state. Otherwise, you'll pay taxes to or get a credit from the state with a tax code.

Don't forget local business licenses and to register your entity (unless you are a sole proprietor) with each state in which you work. I just posted an article with detailed instructions on how to do this. You might also want to read this article on the different types of entities that you will have to choose from.

A relationship with an experienced CPA is highly advised.

 

[litovskyassetmanagement]

Rex wrote:

Probably shouldn’t start a defined benefit for several years.

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I'd say that paying down all debt (esp. high interest) should be a high priority.  As a solo, if you are at least 37 you will benefit from a DB plan, but probably not before that.  Also, with a DB plan you must have a stable income - you can't just open a DB plan and then become an employee two years later, that won't look good for the IRS.  One way to decide whether a DB plan would be a good idea: count backwards.  If you want to retire when you are 50 and you are 35, you might start one at age 37.  If you want to retire at age 60, chances are you might want to start one at age 45.  This is because you will max out your plan within 15 years or so ($2.6M), so it might be better for tax planning purposes to start a DB plan when you are in your highest earning years to get the most benefit out of it.

Also, at age 35 and below, with a DB plan you will be limited in your DB contribution, but also in your 401k contribution: you can only do $18k + 6% + DB contribution, which might give you $15k-$20k above a full 401k contribution ($18k + 25% of W2), so it won't be worth it at this stage.  At least until age 37 or so I would suggest doing a solo 401k only.

[BlueprintRS]

At age 35, the maximum contribution for the first year of a Cash Balance DB plan is about $70,000. On top of this, you can contribute $18,000 as a 401(k) contribution and 6% of earned income as a Profit Sharing contribution. If your earned income for plan purposes is at the maximum of $270,000, 6% profit sharing will be equal to $16,200.

Your Net Profit reported on your 2017 Form 1040, Schedule C (line 31) would need to be at least $370k in order for your plan compensation to be at the $270k maximum.

A 35-year-old with max plan compensation has the following contribution options for 2017:

401(k)/Profit Sharing Plan only = $54,000 (this is the annual limit)

401(k)/Profit Sharing Plan + DB Plan = $104,200
[ $70,000 DB + $18,000 401(k) + $16,200 Profit Sharing ]

You have until the end of the year to decide if you want to establish a 401(k) and/or DB Plan for the 2017 tax year.

[litovskyassetmanagement]

fiscallynaive wrote:

4th year EM res that recently signed as an IC

No kids, single

What are my retirement account options? Not sure if helpful, but salary will range from 450-550k

Also, how does taxation work if I travel for work? I do not reside in the states I will be working. Do I pay state taxes on income made in that particular state?

 

Thanks,

Totally clueless

 

Click to expand...

Bottom line is, you need to make sure that you have a stable 1099 income over the next several years, and this year you might not have enough income for a DB plan.  If you will change from a 1099 to a W2 in a year or two for example, that won't be good for having a DB plan. Start with a solo 401k plan for 2017, and you can see at the end of the year whether a DB plan would work for you in 2017.  Just don't rush into something that you might regret doing later.  It costs money closing a DB plan, so you are better off making sure that the conditions are perfect for this type of plan.  Another way to boost your plan contribution is to add your spouse to the payroll, and that can help increase your net contribution into a 401k and/or DB plan.