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Calling all Independant Contractors!
Old 02-23-2008, 12:47 PM   #1
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Calling all Independant Contractors!

I'm about to start a locums job in addition to my regular gig. I've been researching my options for retirement accounts and think the SEP IRA will be the way to go given how easy it is to setup and the amount of money I can set aside. I'm confused, however, about how much I can contribute as the wording is vague. As self employed do I get to contribute both the employee personal contribution of up to $5000 PLUS the up to 20% of self employed income or just a flat 20% of self employed income?

Thanks in advance

DD
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Old 02-23-2008, 12:55 PM   #2
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As far as I know, if you have a 401(k) option with your normal gig, then you are only eligible for the 20% contribution of net profits as the employer-side of your self employment.

I'm currently trying to dig out of my own mess so I wouldn't listen to me if I were you.
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Old 02-23-2008, 12:58 PM   #3
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You may want to look at this FAQ on the board:

http://www.early-retirement.org/foru...ore-30751.html

Plus, this article describes in plain English how to calculate retirement contributions when you have more than one employer or are self employed and employed: Common Questions About Retirement Plans
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Old 02-23-2008, 11:13 PM   #4
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Thanks Martha those links were very helpfull.

DD
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Old 02-24-2008, 12:52 AM   #5
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DW switched from a SEP IRA to an Individual 401k last year. Definitely higher total deferal limits with the Individ 401k. Her's went from roughly $15k to $25k. It would have been a hassle for us to set up with Vanguard since they did not have internal Individ 401k plans (her SEP IRA was with Vanguard). So we used T Rowe Price instead, which did have the plan making the paperwork easier. Very reasonable fee to set it up and really not that much more paperwork than a SEP. You can't run the exact 25% calculation till after the year ends since most independent contractors don't what their exact income will be ahead of time. Not an issue though.

TRowe explains the individ 401k here. Good luck

T. Rowe Price


From T Rowe's web site:

"You can contribute up to 25% of compensation per participant to the Individual 401(k) Plan. On top of that, you can add up to $15,500 more in salary deferrals for tax year 2007 and 2008 if you're under age 50 ($20,500 if you're age 50 or older). These salary deferral contribution limits apply if you are making before-tax salary reduction contributions, Roth plan contributions, or both to your Individual 401(k) account. Total contributions cannot exceed $45,000 per participant under age 50 in 2007 ($50,000 for investors age 50 and over in 2007) and $46,000 per participant under age 50 in 2008; $51,000 for investors age 50 and over in 2008. "
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Old 02-24-2008, 05:39 PM   #6
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DW switched from a SEP IRA to an Individual 401k last year. Definitely higher total deferal limits with the Individ 401k. Her's went from roughly $15k to $25k. So we used T Rowe Price instead, which did have the plan making the paperwork easier. Very reasonable fee to set it up and really not that much more paperwork than a SEP.. "
Fidelity will set up an Individual (self employed) 401k plan at NO cost. Process is easier if you already are with Fidelity but still no bigge.
Deductions are great. Just want to be sure you and your spouse are the only employees or are willing to give other employees the same profit sharing.
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Old 02-24-2008, 06:14 PM   #7
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At first glance the Individual 401k does look better. Does anyone know if you can use the salary deferral of $15,500 for your self employed income even if you are already using the $15,500 salary deferral to a 403b/401k etc in your regular job?

I also noticed looking at the forms at Fidelity that they multiply your adjusted self emplyed income by 0.20 whereas all the literature states 0.25. I'm confused...

DD
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Old 02-24-2008, 06:45 PM   #8
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Originally Posted by DblDoc View Post
At first glance the Individual 401k does look better. Does anyone know if you can use the salary deferral of $15,500 for your self employed income even if you are already using the $15,500 salary deferral to a 403b/401k etc in your regular job?

DD
No, sorry. You are limited to a total of $15,500 unless your other plan is a 457 plan. You can double up on the employer share though.
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Old 02-25-2008, 06:01 AM   #9
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Fidelity will set up an Individual (self employed) 401k plan at NO cost. Process is easier if you already are with Fidelity but still no bigge.
Deductions are great. Just want to be sure you and your spouse are the only employees or are willing to give other employees the same profit sharing.
Nwsteve
OK, so "extremely" reasonable fees with T Rowe: T. Rowe Price charges no plan set-up fees, loads or sales commissions. There is a $10 annual administrative fee for each Individual 401(k) mutual fund account with a balance under $5,000.
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Old 02-25-2008, 10:17 AM   #10
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"You can contribute up to 25% of compensation per participant to the Individual 401(k) Plan.
Be aware that the 25% is if you're incorporated. If you're truly an independent contractor (you receive a 1099 with your SS# on it), then you're limited to 20% + $15,500.
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Old 02-25-2008, 10:18 AM   #11
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I also noticed looking at the forms at Fidelity that they multiply your adjusted self emplyed income by 0.20 whereas all the literature states 0.25. I'm confused...

DD
See my post above. 25% is if you're a corporation; 20% is if you're a 1099 contractor.
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Old 02-25-2008, 11:19 AM   #12
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Thanks eridanus that clears that up. In all the literature I've been reading - including the IRS documents - the self employed aspect seems to be inserted as an afterthought.

So other then the extra 5% are there any other benefits to forming an S corp vs just stay as an independant contractor?

DD
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Old 02-25-2008, 11:25 AM   #13
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So other then the extra 5% are there any other benefits to forming an S corp vs just stay as an independant contractor?

DD
do you have an llc now or doing everything sole?

There may be some form of asset protection advantages with a legal entity of either sort over a sole.

With an s-corp, you can bill corp-to-corp, which some companies prefer over having to track a 1099 for you.

Additionally, you can take funds out of an s-corp as a dividend (never felt comfortable with this option, personally)

there are legal restrictions on an s-corp as well.

your best bet would be to find a cpa or small business attorney for a meaningful discussion.

Nolo has some excellent books as well. I'll see if I can find the titles I have tonight.
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Old 02-25-2008, 11:26 AM   #14
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So other then the extra 5% are there any other benefits to forming an S corp vs just stay as an independant contractor?

DD
Some people go the S-Corp route for liability reasons (believing that if the corp is sued their personal assets will be protected). I don't know how accurate that is, my business doesn't expose me to liability risks so I haven't looked into it. I wonder just how strong the protection is, and if an umbrella insurance policy wouldn't accomplish the same thing (coverage, plus a team of lawyers to defend you). We had a good thread on umbrella policies a few months ago.
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Old 02-25-2008, 02:45 PM   #15
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My new employer is a contract group that hires physicians to staff area Emergency Department as locum tenens and everyone gets a 1099. In terms of liability I'm a doctor so my understanding is I'm liable but covered (hopefully) by malpractice insurance.

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