I Forgot to Save for My Retirement!

Let’s say you’re pushing 50. Maybe you’re over 50. And, like the woman in the Roy Lichtenstein print, you’re crying: “I can’t believe it. I forgot to save for my retirement!”

You have paid off the mortgage and put the kids through college. Finally, you have extra money to sock away. Now you ask, “How much and how fast can I save for my retirement?”

The way I see it, you have three options:

  1. Max out your current employer’s 401(k) plan, if that’s even possible, and hope for the best.
  2. Become a self-employed independent contractor and contribute to an Individual 401(k) or
  3. Join Solo Workforce as an independent professional and contribute to the most powerful 401(k) plan in the country.

Which of these options makes the most sense? Well, as the CEO of Solo Workforce I may be biased but let’s look at how each option works and then compare them head to head.

At the end of this comparison, I trust you will agree, the Solo Workforce 401(k) plan is the hands-down best option for anyone who wants to load their 401(k) as fast as possible and as much as possible with the lowest possible gross pay.

First The Rules

The Internal Revenue Service sets limits on how much you can contribute to a 401(k) plan. Here are the IRS contribution limits for 2016:

  • Employee’s maximum voluntary deferral from gross wage:
    $18,000 ($24,000 if age 50 or older by year end)
  • Maximum contribution from all sources, including employer’s contribution:
    $53,000 ($59,000 if age 50 or older by year end)
  • Employee compensation limit for calculating contributions:
    $265,000
  • Maximum rate of contribution:
    May not exceed 100% of gross wage
  • Maximum employer contribution as a percent of the employer’s total payroll:
    25% of total gross wage for all employees

Option 1. A Typical Corporate Plan

Most companies impose additional restrictions on the employer’s contribution. Many companies offer no employer contribution at all. Others limit the employer’s contribution to something like: “X” percent of the employee’s voluntary deferral provided it does not exceed “Y” percent of the employee’s gross pay.

Employer restrictions of this type can make it virtually impossible for corporate employees to take full advantage of the generous IRS limits.

The company-sponsored 401(k) plan for salaried employees at General Electric is typical of plans offered by large corporations. It is generally considered one of the best corporate plans in the country.

The General Electric 401(k) plan breaks down as follows:

  • Voluntary Deferral from Gross Pay: Qualified employees may carve out from their taxable gross pay a tax-deferred contribution to their 401(k) account up to the IRS limit.
  • Company Contribution: General Electric will then contribute an amount equal to 50% of the employee’s voluntary deferral, provided the match does not exceed 8% of the employee’s gross pay.

In the discussion below I’ll refer to this arrangement a “Typical Corporate Plan”.

Option 2. Individual 401(k) Plan

An individual 401(k) plan gives an independent contractor the opportunity to load their tax-deferred retirement account faster and with more money than can any employee with a typical corporate retirement Plan.

An individual 401(k) plan breaks down as follows:

  • Voluntary Deferral from Gross Pay: Up to the IRS limit for voluntary deferrals, provided it does not exceed 100% of gross pay.
  • Company Contribution: Not to exceed an amount equal to 25% of annual gross pay.

As a self-employed independent contractor, your gross pay is the total of your business’s gross receipts less all business-related expenses, cost of benefits, employer’s share of payroll taxes and your business’s 401(k) company contribution.

Option 3. Solo Workforce 401(k) Plan

Solo Workforce provides the nation’s most powerful employer-of-record platform, designed specifically for highly skilled, independent-minded contract professionals, freelancers and consultants. Solo Workforce’s innovative business model allows our contractors to load their 401(k) faster and with a lower gross pay than any other 401(k) plan in the country.

When an independent professional joins Solo Workforce we set them up as the manager of their own one-person division. Each division operates like a one-person business and the division manager operates like a self-employed independent professional. In this regard, each division manager enjoys all the freedom, independence, flexibility and tax advantages of self-employment.

As a corporate employee, each division manager also qualifies to receive the executive-level benefits and personalized administrative support of elite corporate employment. I like to say, “Solo Workforce professionals enjoy the best of both worlds.”

Division managers locate projects and contract assignments on their own or with the help of a third-party staffing agency. Solo Workforce signs the contract with the client, invoices for work performed, collects accounts receivable, administers the employee’s benefits, processes the employee’s payroll and issues IRS Form W-2 at the end of the year.

Collected revenues generated by each division manager enter the division as a pre-tax revenue stream. These pre-tax funds purchase the employee’s benefits, pay the employer’s share of payroll taxes, reimburse the employee for out-of-pocket business and medical expenses and contribute the employer’s match to the division manager’s 401(k) account. The remainder of the revenue stream constitutes the division manager’s taxable gross pay.

The Solo Workforce Roth 401(k) Retirement Savings Plan is similar to an individual 401(k) plan, with a couple of significant differences.

First, recall that the IRS maximum employer contribution is 25% of gross pay. When there is more than one employee, the 25% limit is based on the aggregate gross pay for all employees. Solo Workforce has many employees and a significant number choose not to contribute the maximum amount to their 401(k). They have mortgages to pay or kids in college or any number of valid reasons NOT to max out their 401(k).

Accordingly, the aggregate Solo Workforce company match is less than 25% of total payroll. A Solo Workforce employee who wants to contribute more than 25% of gross pay can take advantage of this excess capacity and have their division contribute up to 100% of year-to-date gross pay as a company match.

Second, the Solo Workforce match is set at 200% of the employee’s voluntary deferral from gross pay. So, for example, if an employee’s voluntary deferral is $10,000, the employee’s division (funded by the employee’s pre-tax revenue stream) will contribute up to an additional $20,000. If the total employer contribution should exceed an IRS limit, the match is reduced accordingly.

Comparing All Three Options

Let’s compare the maximum possible annual contributions, both as a dollar amount and as a percentage of the IRS upper limit, for each of the three options at three levels of gross pay: $75,000, $140,000 and $265,000.

 

Gross Pay: $75,000
Annual Contribution to 401(k)

Typical Corporate Employee:

Independent Contractor:
Solo Workforce Professional:
Under Age 50
$24,000 (45%)
$36,000 (69%)
$53,000 (100%)
Over Age 50
$30,000 (51%)
$42,750 (72%)
$59,000 (100%)

 

At an annual gross pay of $75,000, only the Solo Workforce 401(k) plan lets an individual contribute up to the IRS maximum amount. The other plans in this comparison lag significantly behind the Solo Workforce plan.

It should be noted that a Solo Workforce professional who makes more than $75,000 can max out their 401(k) as soon as their gross wage reaches the $75,000 mark. By contributing earlier and at a faster rate, a Solo Workforce professional is able to leverage the power of compounding in order to make thousands of additional dollars which are simply unavailable for either a typical corporate employee or independent contractor.

 

Gross Pay: $140,000
Annual Contribution to 401(k)

Typical Corporate Employee:

Independent Contractor:
Solo Workforce Professional:
Under Age 50
$27,000 (51%)
$53,000 (100%)
$53,000 (100%)
Over Age 50
$35,200 (60%)
$59,000 (100%)
$59,000 (100%)

 

In sharp contrast to the Solo Workforce 401(k) plan, an independent contractor must earn at least $140,000 before they can contribute the maximum amount to their 401(k). This is almost twice the annual gross pay required by a Solo Workforce Professional to contribute the same amount. In the meantime, the Solo Workforce professional’s retirement savings account has been growing exponentially at the maximum rate while typical corporate employees with the same annual pay continue to lag far behind.

 

Gross Pay: $265,000
Annual Contribution to 401(k)

Typical Corporate Employee:

Independent Contractor:
Solo Workforce Professional:
Under Age 50
$27,000 (51%)
$53,000 (100%)
$53,000 (100%)
Over Age 50
$36,000 (61%)
$59,000 (100%)
$59,000 (100%)

 

The amount of $265,000 is the 2016 IRS employee compensation limit for calculating contributions to a 401(k). Even if you make more than $265,000 in 2016, you cannot contribute more to your retirement plan.

Even at this very high gross pay, our typical corporate employee cannot contribute more than 51% or 61% of the IRS limit, depending on age. In fact, the typical corporate plan caps out at only $27,000 at an annual wage of $112,500 for employees under age 50. For employees over age 50, the typical corporate plan caps out at $36,000 at an annual wage of $150,000. No matter how much our typical corporate employee earns in 2016, they cannot contribute more than 51% and 61% of the maximum allowable amount.

A Clearly Superior 401(k)

Virtually all corporate 401(k) plans are designed to limit the employer’s financial liability when employees elect to contribute high voluntary deferrals. Typical corporate plans work reasonably well for employees with gross pay less than $75,000. However, they are woefully inadequate for employees with higher rates of pay.

Individual 401(k) plans are a significant improvement over typical corporate plans. Their principal limitation is the IRS rule that limits the company contribution to 25% of gross pay. Nevertheless, an independent contractor with an individual 401(k) can always contribute more than a corporate employee with a typical corporate plan. And, provided the independent contractor can generate a gross pay of $140,000, they can contribute the maximum amount allowed by the IRS.

Clearly, the Solo Workforce 401(k) retirement savings plan is the superior choice. It’a power derives from two sources.

  • First, the company match is 200% of the voluntary deferral.
  • Second, excess capacity in the 25% rule lets the employee’s division contribute up to 100% of gross pay to the employee’s retirement account.

These two factors make it possible for a Solo Workforce professional earning as little as $75,000 gross pay to contribute up to the 2016 IRS maximum of $53,000 (or $59,000 if over age 59).

If you are pushing age 50 and you find yourself crying: “I can’t believe it. I forgot to save for my retirement!”, or you are younger and want to retire a multimillionaire, your best option is clearly to work as an independent professional through Solo Workforce. The tax savings alone, leveraged by the power of compounding, will add thousands of dollars to your total compensation.

Clearly, Solo Workforce is your best choice if you are trying to sock away as much as possible before you have to retire.