Self-Employed Retirement Accounts

And we're going to talk about retirement accounts, retirement savings plans, whatever you want to call them for the self employed. Self employed means you don't have a boss, right? You are the boss. And so that might mean you're getting paid on a 1099 for most stocks. That's what it means. You don't get a W2 at the end of the year, you get a 1099. I'm not going to talk about K1s. People that K1s are in partnerships and in a partnership, your retirement account options are mostly limited to what the partnership offers. Just like when you're an employee, you are limited to the retirement accounts offered by your employer. When you're a self employed person, you are the employer. So you get to go out there and choose the employer offered retirement plans. Okay, so let's talk about what those options can be. If you are self employed. The main stay of retirement savings for the self employed is what's called an individual 401k. And this is just a 401k where there's only one person in the company. Right. You can have your spouse in there as well, but that's it. Once you have more than your spouse, you got an employee beyond your spouse. You can no longer use an individual or a Solo 401. But these are awesome. If you have one of these, you should be so happy because it is a great way to save if you make enough money and you don't have to make that much depending on the type of contributions you make. If you make enough money, you can put $69,000 in there this year for those under $50,000 for 2024. It goes up with inflation each year. But $69,000 is a lot of money. You put $69,000 away every year for retirement and you will retire a multimillionaire if you have any sort of reasonable normal career length. The cool thing about these accounts though is you're in charge. You can go anywhere you want to open them up. Now, these days I actually think it's worth passing on some of the free ones that you can open at Fidelity and Schwab. You can't do this anymore at Vanguard, they got out of this business recently. But I actually think it's worth paying someone to set this up for you. And the reason why is if you get a customized one from some of the people we have on our recommended page, if you go to the tab and go down to retirement plans, you'll see the 6 or 8 of people there that can help you do this, but they can put together a customized plan. And the benefit of that is you get to choose all the investments. You can actually choose investments that aren't typically offered in 401ks. You can make it basically a brokerage window. You can buy anything available at the brokerage that often includes some private investments if you're interested in those sorts of things. And so that's cool. But you can also put in some cool options. You can have a Roth option. You can have an option to take loans from the 401. You can allow after tax employee contributions and in plan conversions. When you put those two together, it's often called a mega backdoor Roth IRA. Yes, you could put all $69,000 in there as Roth contributions. So there's a lot of cool things you can do when you have a customized plan. Your 401 offered by your employer or your partnership may offer some of those, but it's pretty uncommon that it offers all of them, but your individual 401 can offer all of them. And as we've grown here at WCI, we had to abandon our individual 401s, but we opened up a 401k that offered all those options as well. And so it's been pretty awesome to be able to participate in that, not only as an owner employee, but I think the employees appreciate having a good 401k as well. Okay, that's the first option. A lot of you out there are sitting there with a SEP ira. And a SEP IRA is used by lots of people that are self employed. The contribution total contribution limit is the same at 69,000. But it has a number of downsides that make this less than ideal for most white coat investors. One is you don't have as many options for like the mega backdoor Roth option and that sort of a thing. You actually have to have more income in a lot of situations to max it out than you do with an individual 401 because you don't have the $23,000 for those under 50 employee contribution to help get you to that maximum contribution a lot of times. Well, a SEP IRA is not going to allow for after tax employee contributions like an individual 401k can. So those are downsides. The other big downside though with a SEP IRA is it counts toward the pro rata calculation when you're doing your backdoor Roth IRA each year. And so that's why a lot of white coat investors avoid it. If they have a SEP IRA, they tend to open an individual 401 and roll the SEP IRA in there. It's just not ideal. It's not as good as an individual 401. The only advantage really that it has over an individual 401 is it can be opened a little bit faster with a little less paperwork. And you don't have to file a form called 5500EZ. This is not a hard form to file. It's just an informational return you have to do for the IRS each year. It's due July 31st every year. When you had more than $250,000 in the account at the end of the prior year, that's when you have to file. And so that's. That's not a bad thing to file. It's not that hard to file. You just have to remember to do it, because the penalties for not filing it are terr. And if you botch it once, a lot of times they'll kind of forgive you if you ask them to. And you can get out of those penalties, but they're really high penalties. So if you have an individual 401 with more than $250,000 in it, you do have to file a 5500EZ every summer. Okay. Don't forget to do that. Okay. Some companies, you know, small practices or whatever, they decide to open what's called a simple IRA. And simple doesn't mean it's just an IRA. It's not a traditional IRA. It's a simple IRA. And the problem with the simple IRA is it's generally inferior to a 401K. It's not even as good as a SEP IRA. You can't put as much money into it. But in some situations, depending on who your employees are and how much they want to save, it might make sense. If you got a bunch of employees in your practice, they don't want to save a whole bunch of money. A simple IRA can actually make sense to be the main retirement savings plan at your practice. But if you're paid on a 1099, you're just an independent contractor and you don't have any employees, you do not want a simple ira. That is not the best plan for you. Don't open that. Okay? Now remember that anybody. Oh, the other thing you can do. I ought to mention this. We're getting into the weeds here a little bit. But you can actually open what's called a cash balance plan. And this is a type of defined benefit plan or pension. You can open a personal one even if you're the only employee. Right. You're paid on a 1099, you're an independent contractor. You can open a personal defined benefit plan and depending on how old you are, you might be able to put a whole bunch of money in there. My partnership has a cash balance plan like this. I'm allowed to put $120,000 a year in there. If I was working more and seeing more patients and earning more, I could max that out. Right now I don't make enough to max that out, but I'm only 49. Right. If you're closer to 60, you can put even more money in there. So if you really want to defer a lot of money and dramatically lower your tax bill, you can open one of these plans. It costs a little bit more than your 401k does. The investment options aren't quite as awesome. There's a few more restrictions because remember, this is a pension, really. There's an extra 401, but it's masquerading as a pension. So it has to follow some pension rules. But eventually you're just going to roll the balance into your 401. So it's like an extra 401, but something to look at. If you want to save more than that $69,000 you can stuff into an individual 401k. Okay. The other things you can do are things that anybody can do, right? Whether they're an employee or not. You can do a backdoor Roth IRA for you and your spouse. Right? You got to be aware of the pro rata calculation. If you got some money sitting in a SEP simple or traditional IRA. But for most of us, if you're under 50, you can put $7,000 in there for you this year and you can open one for your spouse and put $7,000 in there for them each year. Obviously, it's a two step process. You put it in the traditional IRA, then you move it to the Roth IRA the next day or the next week or whatever. So you're contributing to the Roth indirectly. That's another 7,000 to $14,000 more if you're 50 plus that you can put in there. Okay? Everybody whose only health insurance plan is a high deductible plan can contribute to a health savings account. I think the limit for this year is 8300 for a family. And remember, a family can be you and your kid. It doesn't have to be you and a spouse. And so that's another great savings account, right? Triple tax free. Yes, it can be invested. You don't even have to take the money out in the same year that you contributed or that you spent it on healthcare. You can save the receipt for decades if you want and pull the money out later. Tax and penalty free. After age 65, it acts just like your IRA basically just comes out and you got to pay tax on it, but no penalty. Even if you're not spending it on health care. If you have access to an hsa, there's really little reason not to max it out. Okay? The other thing everybody has access to is just a taxable brokerage account, right? There's no contribution limit. There are no restrictions on when you pull the money out or what it can be spent on. Obviously it's taxed as it grows. That's the downside to it compared to all these retirement accounts. But it is nice and flexible and you can put as much as you want into it. This is actually the biggest part of our savings now, just because we were able to save more than we were able to put into retirement accounts for a number of years. And that's the case for many people. But don't forget a taxable account is not the end of the world. You don't have to stop saving for retirement just because you filled up your retirement accounts. You can always invest more into a taxable or non qualified brokerage account. You can still invest it tax efficiently. Typically people are investing in things like a total stock market index fund or your municipal bond fund or things like that to keep it tax efficient. But there's no reason you can't invest as much as you want there. Alright? So I hope that is helpful to you as an overview of what is available to the self employed when it comes to retirement accounts. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.