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Advice for a Contractor
Old 03-31-2019, 06:57 AM   #1
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Advice for a Contractor

Morning All -

It's looking like our son will be starting a new job as a contractor. Without the health benefits and retirement benefits, his salary is substantially greater than his previous employment. He is ok with the health benefit part due to being on his spouse's health plan.

But I really want to emphasize to him that while you are a contractor, which I am hope will be only for a few years as the position takes him away from family, to use the opportunity to sock as muck money away as he can - he is naturally frugal luckily. So i am thinking a good chunk in a taxable account for their future home purchase. Any good ideas?

And as far as retirement, well - no more 401k plan for tax deferred savings. He does contribute to a Roth IRA. Where else can he go for tax deferred growth for retirement access in 30 yrs? Fixed Annuities? Life Insurance? I cringe when I say this as someone who grew up thinking Annuities is a four letter word.

Appreciate your thoughts.

Kannon
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Old 03-31-2019, 07:11 AM   #2
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Tax-deferred is only a good option if his current tax bracket is higher than the tax bracket that he expects to be when retired. What is his current tax bracket? If it is 12% or lower (~$103k of family income) then I don't see tax-deferred savings as being beneficial.

Taxable account investments that pay qualified dividends that are taxed at 0% if their taxable income is $77,200 or less (2018) would be a good choice... even if their taxable income is higher the tax bite on qualified dividends would only be 15% (rather than 22% or more).

A good tax-free muni fund may also be a good possibility for him.
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Old 03-31-2019, 07:42 AM   #3
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As an independent contractor he is able to take advantage of a number of IRA/401K plans that allow fairly large contributions. For example, the Solo 401K allows $18K contributions plus an additional 25% of salary up to $53K.

First link I pulled up: https://www.nerdwallet.com/blog/inve...t-contractors/

If he is going overseas to work he may be able to exclude a little over $100K/year from federal tax under the "physical presence test" which requires him to spend less than 35 days in the U.S.
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Old 03-31-2019, 08:07 AM   #4
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I need to clarify - my error.

I wrongly used the word contractor. He will be receiving a W2 - he will be an employee with no benefits (like a contractor).

He use to be a contractor getting a 1099 Misc. For his new job he will be getting a W-2. And that's the new dilemma - no more contributions to his solo 401K that he started at Vanguard.

Sorry for the confusion.
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Old 03-31-2019, 09:43 AM   #5
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So he switched from a contractor to become an employee.

Is he sure there is no 401K, or does the company actually have a 401K but does not match ?
He can keep his solo 401k in case he goes back to 1099 in the future.

He can still save in a regular brokerage account, just buy super tax efficient stocks like BRK.B , where he could buy it and pay zero taxes on holdings while holding it for decades, and pay the preferred capital gain when sell.
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Old 03-31-2019, 09:58 AM   #6
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No 401k offered.

I admit that the salary is very enticing - but have to remember no 401k plan and no health benefits.

Is this the wave of the future for the young workforce? I am a traditionalist who very much liked my corporation's 401k and health benefits
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Old 03-31-2019, 10:08 AM   #7
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Sounds like he's working for a staffing firm that'll place him at one of their clients' sites. I used to get a lot of employees through a temp-to-hire arrangement like this, and one of my nieces got a perm job at Google this way, so perhaps it'll eventually turn into a regular job with benefits again.

He should keep contributing to the Roth IRA, though if his salary has gone up significantly, he may have to do it as a backdoor conversion. Hopefully he doesn't have an existing tIRA or a previously rolled over 401K as that makes the backdoor route more difficult. His spouse should keep on maximizing 401K contributions. Other than that, just save it in a taxable brokerage account and invest in low cost index funds. If they need to have separate buckets for "house" and "retirement" in order to manage their savings, then they should just open two accounts.

He does need to have enough life insurance to take care of his family if something should happen to him, but I don't think that's a great retirement savings vehicle. If he was previously getting life insurance as an employment benefit, and that's going away, then he should look into replacing it ASAP.
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Old 03-31-2019, 10:25 AM   #8
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Quote:
Originally Posted by kannon View Post
No 401k offered.

I admit that the salary is very enticing - but have to remember no 401k plan and no health benefits.

Is this the wave of the future for the young workforce? I am a traditionalist who very much liked my corporation's 401k and health benefits
Lots of companies, especially smaller ones, don't offer a 401K. Less than 40% of the labor force has access to one, and even for those who do, young employees are often moving along before any employer match vests. So this is really not abnormal.

I am a little confused about how there can be no health insurance though. If they're in the U.S. and have 50+ employees, they're required to offer health insurance or pay a tax penalty.

If they don't have to offer health coverage because they have fewer than 50 full-time employees, well, that's pretty small for a staffing firm, and I'd want to know how many clients they actually have before taking a job with them. If it's only one, then it's really just a way for the client to have more employees without having to comply with various tax and labor laws that kick in for larger employers, and the IRS (and the EEOC, Dept of Labor, etc) tends to side-eye those arrangements when they find out about them.
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Old 03-31-2019, 11:01 AM   #9
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Quote:
Originally Posted by kannon View Post
No 401k offered.

I admit that the salary is very enticing - but have to remember no 401k plan and no health benefits.

Is this the wave of the future for the young workforce? I am a traditionalist who very much liked my corporation's 401k and health benefits
It's actually been going on for some time. After older workers are pushed aside, where can corp go next to cut expenses? They use a body shop.

In the 80's, if I recall correctly, big gov made a push to help out the body shops. This is how we got here.

If his total wages exceeds IRA limit for single, then he'd want to find a reasonable taxable fund or ETF to plow money into. Otherwise, put max into the IRA. Think it's $6,000 for him.
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Old 03-31-2019, 11:11 AM   #10
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Only advice is to have him remember the tax issue. Besides the income tax he has both sides of the SS tax. It is very hard to write out that check on April 15th when you are used to having it with held
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Old 03-31-2019, 05:17 PM   #11
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He can also contribute to a spousal Roth. No immediate tax benefits, but one day--yes.
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Old 03-31-2019, 06:19 PM   #12
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Keep a very close eye on the Receivables.

Have flow down to your sub contractors on any T's and C's that you negotiate with your customer. If your customer insists on a hold back, flow that percentage hold back down to each sub as appropriate.

Get a lawyer who specializes in small business. Always be prepared to place liens in a timely manner.

The profit is in good project management, good subs, and most especially change orders. Every change calls for a change order an associated cost to the client.
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Old 03-31-2019, 08:29 PM   #13
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I've seen so many carpenters (and the like) working for cash on construction jobs or receiving 1099's when contractors claim they're subcontractors.

I would never work for anyone that paid under the table. And I would never work in a job where I could fall off a ladder or house framing if there was no healthcare coverage. There are just too many accidents that happen working construction.

If I was working in any hazardous profession, purchasing Accident and Health Insurance (like AFLAC) is more important than any term life insurance. There's much more chance it'll be used.
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Old 03-31-2019, 11:47 PM   #14
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Quote:
Originally Posted by Bamaman View Post
I've seen so many carpenters (and the like) working for cash on construction jobs or receiving 1099's when contractors claim they're subcontractors.

I would never work for anyone that paid under the table. And I would never work in a job where I could fall off a ladder or house framing if there was no healthcare coverage. There are just too many accidents that happen working construction.

If I was working in any hazardous profession, purchasing Accident and Health Insurance (like AFLAC) is more important than any term life insurance. There's much more chance it'll be used.
I first thought this was a construction contractor position. But then I thought maybe this is a 1099 "contractor"

Not sure in what sense OP meant the term.
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