My wife is looking at going back to work as a 1099 contract employee in the Fall. I am a full time W2 employee and max out my 401K contribution as well as contribute to an after tax Roth 401K (via an in-plan conversion) which is a really nice employee benefit. I was wondering if there was a way to set up a separate retirement savings plan for her and what would be the most efficient plan?

When I was 1099, I had a SEP. If I remember right, I was able to dump 25% of billings into it, even before writing everything off (home office, utilities, clothes, milage, etc,)

Definitely talk to a CPA. I don't know if it is different as a married but it is crazy how low you can drive your tax rate as a 1099

What will she be doing and how long? When I was doing that I formed an S Corp which allowed me to contribute profit sharing and 401k. Was a sweet setup.

Is she going to be an independent contractor? Self employed? Or employed by an entity that cashes the 1099 checks?

How much are you trying to sock away? SEP is the first step. Then you get to look at Solo-k. Then, a 401k + profit sharing + cash balance plan if you're really trying to save.

Your Financial Advisor should be able to run #s on each of these ideas.

This is good stuff fellas - the real background here is she's been mom / wife, house manager, cook, etc for almost 11 years and wants to get back in the professional world (at least partially). We don't financially need her to, it's just something she wants to do and I understand.

Independent Contractor

Do an S-Corp to save taxes and then do a SEP. HOWEVER,...

1. You will have to pay her a salary. This means quarterly employee reporting, employment, and filing W2s. If her pay is significant, you have a chance to save on SE (Fica SS & Medicare) taxes since only the salary will be subject to the taxes. But you will add complication (quarterly reporting and an S-Corp tax return).
2. Do a SEP. In this situation SEP will be limited to 25% of SALARY she is paid. If she is getting paid less than 50,000 you may want to look at a SIMPLE plan instead.

-OR-

If you dont want all that complication, just talk to someone about doing a SEP. You will still pay taxes though. A lot of taxes depending on how much she makes.

I would suggest talking to a financial advisor and a CPA and be honest about what you expect and plan to do. How much is she going to make (net after expenses not gross), for how long, will it increase over time, how much are you willing to put in the retirement plan, etc. Those answers will determine which plan is best and also whether a S Corporation will save enough taxes. SEP-IRAs are easy to have but are a percentage of net income (self-employed) or wages (S Corp). The larger the income or wages, the larger the contribution allowed. If income is going to be low but you want to contribute more, then you may want something with an elective deferral (Simple IRA, 401k) so that the contribution is not as dependent on the income/wages. If you are looking for the absolute maximum contribution then a S Corporation may not save much tax because you will need to pay a much larger salary to maximize the retirement plan. S Corporations are most beneficial when you can have a lower salary then the overall income.

Hey there, local (B/CS) CPA here. If you're interested in discussing this in depth let me know and you can swing by my office or wherever you'd like to meet. Also, my brother in law is a financial advisor, so I could also put you in touch with him.