Physicians often seek opportunities to supplement their retirement savings and defer taxes beyond their traditional retirement plans, such as a 401(k), 403(b), or 457(b). Physicians can have the opportunity to earn 1099 income through independent contracting, consulting, or other non-traditional arrangements (such as moonlighting or locum tenens services). The additional 1099 income can be used strategically to accomplish the goal of supplementing retirement savings and increased tax deferral through the use of additional retirement plans beyond any primary employer provided plans. The additional tax deferral helps many physicians save on taxes today while highest marginal tax brackets – the tax-deferred assets are then distributed in retirement to supplement lifestyle at a lower expected tax rate. Below, I address this financial goal with a guide on understanding and maximizing your 1099-income:
WHAT IS 1099 INCOME?
1099 income refers to income received as an independent contractor, freelance, consulting, or other self-employment activities. Physicians who work as independent contractors, moonlight, or provide locum tenens services are often paid 1099 income.
ASSESSING YOUR FINANCIAL SITUATION
Before determining the strategic use of any 1099 income, begin evaluating your current financial situation. This begins with a financial plan to map out your road to retirement. This includes understanding all the financial savings buckets that are available to you, how to optimally contribute to those buckets, and how much you will need to set aside each year to achieve a comfortable lifestyle in retirement. Once you have determined your savings need and taken advantage of any primary employer retirement plans (some may include contribution matching), you can consider an additional retirement plan for your 1099 income for increased retirement savings and tax deferral.
CHOOSING A RETIREMENT PLAN FOR YOUR 1099 INCOME
There are several retirement plans available for physicians with 1099 income. It is important to understand the requirements, eligibility, and strategic use of each plan. Below, we highlight several retirement plan options:
- Traditional or Roth IRA
- A Traditional IRA is a tax-deferred retirement account. A contribution to a traditional IRA is pre-tax and can provide an income tax deduction, subject to eligibility.
- A Roth IRA is a tax-free retirement account. A contribution to a Roth IRA is post-tax and benefits from tax-free growth. A Roth IRA is subject to income limitations, which physicians often exceed and deem them ineligible to contribute directly.
- The annual contribution limit is $7,000 with an additional catch-up of $1,000 for those ages 50 or older in 2024.
- Easy to set up and operate with low administration costs.
- Flexible annual contributions.
- Solo or Individual 401(k)
- A solo or individual 401(k) is a retirement plan eligible for those who are self-employed with no employees beyond a spouse in their practice. A solo or individual 401(k) will allow for tax deduction and tax-deferred growth.
- The annual contribution limit is $23,000 for elective deferrals and up to $69,000 with employer nonelective contribution. An additional catch-up of $7,500 is available for those ages 50 or older in 2024.
- Allows for higher contribution limits relative to other retirement plan options.
- Easy to set up and operate with low administration costs.
- Flexible annual contributions.
- Simplified Employee Pension Plan (SEP-IRA)
- A SEP IRA is a tax-deferred retirement account for those self-employed. A SEP IRA will allow for tax deduction and tax-deferred growth.
- The annual contribution limit is 25% of the employee’s compensation, or $69,000 in 2024. There is no catch-up available for a SEP IRA for those age 50 or older.
- Easy to set up and operate with low administrative costs.
- Flexible annual contributions.
- SIMPLE IRA
- A SIMPLE IRA is a tax-deferred retirement account available to small businesses with 100 or fewer employees. A SIMPEL IRA will allow for tax deduction and tax-deferred growth.
- The annual contribution limit is $16,000 with an additional $3,500 catch-up for those age 50 or older in 2024. An employer is required to contribute each year either a matching contribution up to 3% of compensation or a 2% nonelective contribution for each eligible employee.
- Easy to set up with low administrative costs.
- Lower contribution limits and less flexible annual contributions.
SEEK PROFESSIONAL GUIDANCE
Consider consulting with a qualified financial professional who specializes in retirement planning for physicians. The IRS has established rules and guidelines to follow for each retirement plan, thus regular monitoring and compliance is important as you establish and fund a retirement plan. There are many considerations when choosing a retirement plan, such as eligibility and tax benefits or pitfalls. All of which should be carefully reviewed to ensure the retirement plan you choose is appropriate for your financial goals.
CONCLUSION
Physicians can use their 1099 income as a powerful tool to fund their own retirement plans and maximize the tax benefits available to them. With careful financial planning, strategic investing, and a clear vision for retirement, you can begin securing your financial independence and a comfortable lifestyle in retirement.
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