I’m a 1099 Independent Contractor. Can I Have a 401(k)?

You left your traditional job.

Or maybe you’ve always worked for yourself.

Business is going well.

You’re making good money.

But there’s one thing you don’t have anymore…

An employer’s 401(k).

So what are you supposed to do for retirement?

Can a 1099 independent contractor have a 401(k)?

Yes. You may be able to establish one for yourself.

It’s commonly called a Solo 401(k) or Individual 401(k).

And if you’re self-employed, it’s worth knowing that this option exists.

What Is a Solo 401(k)?

A Solo 401(k) is a retirement plan designed for a business owner with no employees other than a spouse.

That business owner might be:

• An independent contractor
• A consultant
• A freelancer
• A physician
• An attorney
• A real estate professional
• A salesperson
• Someone earning additional 1099 income outside of a W-2 job

You don’t necessarily need a large company or an office full of employees to have a 401(k).

Your business may be enough.

Do I Need an LLC?

This is a common question.

Not necessarily.

Your eligibility for a Solo 401(k) isn’t simply determined by whether you have an LLC.

There are different ways a self-employed business can be structured.

What matters is your business, your income and whether you have employees who could affect the type of retirement plan you’re able to maintain.

What If I Also Have a W-2 Job?

This is where things get interesting.

Some people have:

W-2 income + 1099 income.

And they may already participate in a 401(k) through their W-2 employer.

Does that automatically mean you can’t have a Solo 401(k) for your separate business?

No.

It may be possible to participate in both.

But this is also where contribution limits and other rules become important.

The plans don’t necessarily operate in completely separate bubbles.

Before deciding how much to contribute, make sure you understand how the rules apply to your specific situation.

How Much Can I Contribute?

This is usually the next question.

And it’s also where we’re going to say…

It depends.

With a Solo 401(k), you may be able to contribute in more than one capacity because you’re both the employee and the employer of your business.

How much you’re eligible to contribute can depend on things like:

• Your income
• Your business structure
• Other retirement plans you participate in
• Your age
• Current IRS contribution limits

This is one of those situations where a quick internet answer may not tell you everything you need to know.

What If I Have Employees?

This matters.

A Solo 401(k) is designed for an owner-only business, although a spouse may be able to participate if they work in the business.

Once you have other employees, different retirement plan rules may apply.

That doesn’t mean you can’t have a 401(k).

It means you may no longer have a Solo 401(k).

And that can change the conversation considerably.

What About a SEP IRA?

You’ve probably heard of this one too.

SEP IRAs have long been popular with self-employed individuals.

So which is better?

SEP IRA or Solo 401(k)?

There isn’t one answer for everyone.

Your income, business, retirement goals, other retirement accounts and future plans for the company can all matter.

Don’t choose one simply because another independent contractor told you that’s what they use.

Their situation may be completely different from yours.

Don’t Forget That Your Business May Change

This is one of the things people sometimes overlook.

Maybe you’re a one-person business today.

What happens if you hire someone next year?

Or your income increases significantly?

Or you leave your W-2 job?

Or your spouse starts working in the business?

The retirement plan that works for you today should also be considered in the context of where your business may be going.

Key Takeaway

Being a 1099 independent contractor doesn’t mean you have to give up access to a 401(k).

You may actually have more retirement plan options than you realize.

The important thing is choosing a plan that makes sense for:

• How you’re paid
• How your business is structured
• Whether you have employees
• Your retirement goals
• Where your business is headed

You built your business around what works for you.

Your retirement plan should be built the same way.