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Hi Finance gurus,

My wife just got a W-2 based contractor job, but the cheasy consulting company does not offer 401K plan. I don't know what's the other retirement plan option in additional to traditional IRA (our combined income does not qualify for Roth IRA).

I did some research and found something like Solo 401K and SEP IRA. But I'm not sure whether these plans can be applied to W-2 based income.

Many thanks for your help!

Are you an independent contractor?

I'm in the same situation as OP. I'm not an independent contractor because I'm getting a W2.

Is there any retirement plan for this situation(other than IRA)

You can try to convince the employer to setup a SIMPLE IRA plan. SIMPLE IRA plans are similar to 401(k) plans but have less administrative overhead and are only for small businesses. Note that even though they have the word "IRA" in them, they are different than traditional IRAs and Roth IRAs. In particular, they are not subject to the same contribution limit and you can fund a SIMPLE IRA while still funding another kind of IRA.

If you go this route, you should probably do the homework yourself so you can educate the owner(s). There are two important decisions to make: which of the two kinds of SIMPLE plans the employer will sponsor, and who the custodian will be. I'll help you out on the second one: pick Fidelity! If you don't pick Fidelity, you are likely to find yourself in some very expensive (for the employee) mutual funds.

Besides the SIMPLE IRA, as far as I know, you are limited to traditional and Roth IRAs (if you qualify) and then to taxable savings. But take heart, there is some debate about whether unmatched 401(k) contributions are really superior to taxable savings so it isn't the end of the world if you don't have a 401(k) plan.

Something wrong with Vanguard for Simple IRAs?

As far as I know, Vanguard doesn't offer them. Corrections welcome of course.

Maybe they do:

https://flagship3.vanguard.com/VGApp/hnw/content/AccountServ/Retirement/ATSSimpleIRAOverviewContent.jsp

Vanguard would certainly be worth a look as well. I took a quick look at their fees and they have some kind of "index fund maintenance fee" that I'm not paying at Fidelity.

Let me just leave at this. My company has been very satisfied with Fidelity as our custodian. We have had no complaints from out employees either. Fidelity's index fund expense ratios are currently lower than Vanguard's (although there is debate about how long this will last.) I can personally recommend Fidelity as a SIMPLE IRA custodian. I use Vanguard for other purposes and I have been happy with them, but I can't comment on their SIMPLE IRA.

Etrade has a good simple IRA program, in the past they've waived the $25 a year maintenance on accounts <$1000 if the employee signed up for electronic statements. Very easy to setup, I just sent the 5309-simple application from irs.gov to them with a new account setup application for each employee.

The bad news is if the 'cheasy consulitng company' doesn't offer a 401k, they aren't going to sign up for a simple ira anytime soon. The simple IRA requires a 1/2/or3% match for all employees who setup the account, and it requires that you make the plan available to 100% of full time employees that satisfy whatever requirement you setup for # of years of service.

PugRanch said: [Q] But take heart, there is some debate about whether unmatched 401(k) contributions are really superior to taxable savings so it isn't the end of the world if you don't have a 401(k) plan.

I've always had those same reservations. I didn't realize that there was much of a debate on it, but I think there should be.

The biggest advantage for me of the unmatched 401k is that it is automatically deducted each paycheck. Its psychological, but when I look at my paycheck, I just see the number that gets deposited to my checking account, and think I make that much. Meanwhile, the 401k grows. Setting up automatic deductions on my own without the 401k would only occur after the money was deposited.

Still, that's what I'd recommend for the OP.

I know I promote them to no end...but American Funds has some of the lowest operating expenses in the industry...generally less than half that of the industry average! Some solid TIME TESTED returns too! And the cost for setting up a SIMPLE:

Start-up and maintenance fees
$10 per employee set-up fee
$10 per employee annual maintenance fee
may be paid by employer or deducted from employee accounts


Doesn't get much cheaper than that! But you'll need to go through a financial advisor to do it.

So all these SIMPLE IRA or unmatched 401K need to go through employer to set up account... If the cheasy consulting company say no, that's the end.

Looks like I should advise my wife to set up a company, and do corp-to-corp kind of contract. Then she can be treated as self-employed and set up Solo 401K or SEP IRA.

I think you can go for TSA account (or tax-sheltered annuity). With this account you can contribute pre-tax dollars on your own from 1 to 20% (if I remember correctly) of your annual salary. It's your own retirement contribution so you have absolute control on how you want to invest it and you can bring it with you even when you leave the company (portable).

Yes, you'll need the help of the cheesy company to go the SIMPLE route. You can sell it to the owners as (a) much cheaper to administer than a 401(k) and (b) beneficial to the owners as well since they can also start accounts.

I think someone suggested going through a finacial advisor to get a particular fund company. That is what I want you to avoid. If you find yourself face-to-face with a guy in nice suit offering you A- B- or C-shares you are not going to do well. Somebody has to pay for those those suits! To keep expenses down, you want to make sure your employer chooses Fidelity (not Fidelity Advisors!), Vanguard, or someone else like that.

If your employer says no, just invest in tax efficient mutual funds. If you do that, you can learn all about harvesting losses and other tricks played in taxable accounts. True, you don't get the upfront income tax deduction, but you also don't have all the rules and restrictions that go along with 401(k) money. Best of all, when you need the money down the road it will be subject to capital gains taxes instead of income taxes. That's really about the best you can do if your employer absolutely does not want to contribute to your retirement.

coolambo said: [Q]I think you can go for TSA account (or tax-sheltered annuity). With this account you can contribute pre-tax dollars on your own from 1 to 20% (if I remember correctly) of your annual salary. It's your own retirement contribution so you have absolute control on how you want to invest it and you can bring it with you even when you leave the company (portable).

Did some research about TSA, seems only the following employees can participate in a TSA: <img src="i/expressions/face-icon-small-sad.gif" border=0>

employees of public educational systems
employees of tax-exempt charitable organizations (e.g. nonprofit religious organization, hospital, museum, or zoo)
self-employed ministers
employees of Indian tribal governments


You cannot do a TSA/403b account unless you work for a non-profit or governmental agency. Furthermore, even if you do work for a qualified organization, that organization has to allow you to do the required salary reduction for the TSA.

Assuming you did qualify for the TSA, you're allowed to do up to $14,000/yr (more if you're over Age 50). There is no more percentage requirement for the TSA. You're allowed to do a full $14,000 as long as you make at least $14,000 a year.

The traditional IRA looks like the best thing in terms of tax deduction. If you just want tax deferral, you could chose to do a non-qualified annuity which doesn't allow you to DEDUCT but does allow you to DEFER. But other than that, very similar to retirement accounts (can't withdraw until A59.5, tax deferred until then). There are extra expenses with annuities but if you're just looking for tax deferral, this is a good option.


coolambo said: [Q]I think you can go for TSA account (or tax-sheltered annuity). With this account you can contribute pre-tax dollars on your own from 1 to 20% (if I remember correctly) of your annual salary. It's your own retirement contribution so you have absolute control on how you want to invest it and you can bring it with you even when you leave the company (portable).


Hi Eboy2003,

I'm a Financial Advisor at a large brokerage firm. I'm not intending to solicit business. I would like to try to help with your question and then address PugRanch's concern.

You mentioned your wife was hired as a contractor and received a W-2. See if the firm will hire her as a 1099 contractor instead of as a W-2 employee. If they will, she can set up her own Solo 401k/Profit Sharing Plan AND also make contributions for you. I personally use the Pioneer Uni-K for my clients. It costs $100 per participant to set up through an Advisor.

PugRanch's statement "That is what I want you to avoid. If you find yourself face-to-face with a guy in nice suit offering you A- B- or C-shares you are not going to do well." amazes me. Do you think wealthy people do it alone? I was a Military Officer before becoming a Financial Advisor. There are a lot of honorable, decent, trustworthy people in this field. The facts are most individual investors don't have the time, knowledge, desire, or stomach to be a smart investor. The "Odd-Lot Theory" actually gives the group a name. Last point before I get off the soap box: Most people will happily tip 15% for great service at restaurant, but feel robbed for paying someone 1% to manage their retirement nest egg!

Eboy2003, talk with 2 or 3 advisors. Hire the one that you feel comfortable with AND spends time talking about your family's goals BEFORE they tell you about their investment ideas or products.

Hope this helps

PugRanch said: [Q] To keep expenses down, you want to make sure your employer chooses Fidelity (not Fidelity Advisors!), Vanguard, or someone else like that.

Now i haven't done all the reaserch on companies yet...

but you sir are sounding like an ad for fidelity. 'MAKE SURE HE TAKES FIDELITY'
who knows maybe one companies situation is different and a different company might be better.

To be fair, Fidelity just recently announced very low fees for many of their mutual funds (the largest chunk of 401k funds), especially some their index funds. They did it to compete with the other large fund groups known for their low fees, such a Vanguard, T Rowe Price, and a few others. If I'm a financial advisor who earns no commission, I'd recommend my clients go with one of these mutual fund families.

Hello All. I am in a similar situation and have a question.

I am a W-2 employee of a consulting company which does not offer me a 401(k). I plan to max out my 2005 Roth IRA at $4,000.

I would also like to contribute additional money to my retirement accounts. If I've already put $4,000 into a Roth, am I able to open up any other type of retirement account for 2005? If so, what type of account can I open and how much can I contribute?

I don't think I can open a SEP (since I'm W-2), or a personal 401(k) since I'm not self-employed.

Thank you.

Hi eboy2003, if you follow jkmarsh's advice, remember to have your wife negotiate for a "pay raise". Otherwise, if they pay you the same xxx dollars, you're actually taking a pay cut. If she gets a w-2, the company is paying half of her FICA taxes. Most people don't realize that the FICA tax is actually 12.4%, not 6.2% that shows up on their paystubs (the other 6.2% is paid by the employer). If your wife becomes self-employed (gets a 1099 instead), she'll have to pay both the employee and employer tax (it's called the self-employment tax).

So if you can't get the company to "raise" her pay to cover the extra 6.2% tax increase (this would cost the company zilch since they're already paying 6.2% as FICA taxes), you have to weigh whether it's worth it for your wife to get the company to hire her as an independent contractor instead of an employee.

Re Andy5000:
Unfortunately, if you're an employee, you have very few options if your employer doesn't offer a retirement plan. The best you could do is buy an tax-deferred annuity with post-tax dollars; you don't get a tax deduction, and you're taxed on what comes out, but at least you get tax-deferred growth while it's in there. (Remember with tax-deferred annuities, you'll pay a penalty if you withdraw early before age 59 1/2).



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