Ask Merrill Edge
Answers to your investing and personal finance questions
< View all questions
SMALL BUSINESS
JUNE 1, 2018

I Am a 1099 Contractor. Are There 401(k) Retirement Plans for Me?

Answered by
Judith Anderson
Senior Vice President, Retirement & Personal Wealth Solutions
Absolutely. Whether you're a freelancer, independent contractor or a budding entrepreneur, you have access to an expanded range of retirement plans, including an Individual 401(k) and a SEP IRA. These plans offer higher contribution limits than traditional IRAs, with tax advantages.
Learn the retirement contribution options for small businesses

How does an Individual 401(k) work?

An Individual 401(k) — also known as a Solo 401(k) — is designed for business owners without W-2 employees, and it can also be used by the owner's spouse. "With an Individual 401(k), you decide how much to contribute, within limits, and you can choose to contribute as your cash flow allows," says Judith Anderson, senior vice president, Retirement and Personal Wealth Solutions at Merrill Lynch.
Your business can generally deduct contributions you make to an Individual 401(k) as the employer. You may also contribute as an employee, which reduces your personal taxes. Total contribution limits as employee and employer, set at $55,000 for 2018 (or $61,000 if you are over age 50 and eligible for catch-up contributions), are significantly higher than contribution limits for a traditional IRA.

Are there other types of Individual 401(k) plans?

If you decide to open an Individual 401(k), you can utilize traditional contributions, Roth contributions, or both. Perhaps the major difference between them is that traditional 401(k) contributions are made with pre-tax dollars, while Roth 401(k) contributions are made with after-tax dollars. Once a Roth account has been open for five years, you can benefit from federal income tax-free withdrawals once you reach age 59½. If traditional or Roth 401(k) assets are withdrawn prior to reaching age 59½, an additional 10% federal tax may apply to the taxable portion of the withdrawal, unless an exception applies.

What about a SEP IRA?

As a 1099 contractor, you might also consider a Simplified Employee Pension (SEP) IRA as a retirement plan option. Contributions to individual accounts under a SEP IRA plan are generally tax-deductible by your business, and you may be able to contribute as much as $55,000 for 2018 ($54,000 for 2017, up to your 2017 tax filing date plus extension if any) or 20% of your net earnings from self-employment, if less. However, you might have the opportunity to contribute more to an Individual 401(k), through salary deferrals and employer contributions, than to a SEP IRA, which is eligible for employer contributions only and limited to 20% of your net earnings from self-employment. Be sure to consult your accountant or tax professional for advice on the contribution level and retirement account type that may be right for you.
Ready to get started?
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
AR3BLRVS-EXP060119
Connect with us:
LinkenIn
Twitter
YouTube
Connect with us:
LinkenIn
Twitter
YouTube
Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Merrill Edge is available through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), and consists of the Merrill Edge Advisory Center (investment guidance) and self-directed online investing.

Banking products are provided by Bank of America, N.A. and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation.

Investment Products:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value


MLPF&S is a registered broker-dealer, Member Securities Investor Protection Corporation (SIPC)Member Securities Investor Protection Corporation (SIPC) and a wholly owned subsidiary of Bank of America Corporation.

© Bank of America Corporation. All rights reserved.

AR7S5VNY-EXP052219