The Retirement Savings Side Hustle

By Ryan Glinn, CFP®, MBA, CLTC® 

YOUNGSTOWN, Ohio – It’s common under W-2 employee arrangements for folks to have access to qualified plans such as a 401(k) or 403(b). Yet, many Americans work additional jobs as 1099 employees or independent contractors. This makes you a sole proprietor by default in the eyes of the IRS. For people in this situation, it’s possible to open a separate retirement savings vehicle for their “side hustle” income.

Two of the most common plans to maximize tax-deductible retirement savings for 1099 income 
are SEP IRA’s and SIMPLE IRA’s. SEP IRA’s allow an individual to contribute the lower of 25% of net earnings or $58,000 in 2021. SIMPLE IRA’s allow deferrals of $13,500. An additional $3,000 catch-up is available for those over the age of 55. 

Let’s say you earn $150,000 per year as a W-2 employee. You’re 60 years old and are making maximum tax-deductible 401(k) contribution of $26,000. Throughout the year you take on various projects adjacent to your industry that pay $75,000 as net 1099 income. In this scenario, you could max out your 401(k) and make a maximum SEP IRA contribution of $18,750. That’s a total of $44,750 tax-deductible retirement savings. 

A 45-year-old business school professor makes $100,000 per year and maxes out their 403(b) with $19,500. They run their own consulting firm on the side that generates $30,000 of earnings. They can defer $13,500 into a SIMPLE IRA. In this case, a SIMPLE provides more benefit because SEP contributions would be capped at $7,500 (25% of $30,000). 

Implementation of a SEP and SIMPLE for 1099 income is an effective way to simultaneously reduce your tax liability and increase retirement savings. However, they each have specific rules. It’s important to work with an accounting or financial planning professional to help determine if these solutions make sense for your specific situation. 

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

The example(s) given are hypothetical and are for illustrative purposes. Actual results may vary from those illustrated

 This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.  The services of an appropriate professional should be sought regarding your individual situation

Copyright 2024 The Business Journal, Youngstown, Ohio.