Many of our clients, my wife included, are CRNAs. That gives me a personal interest in how W-2 and 1099 income work together. Here is one retirement strategy worth understanding if you are already saving aggressively.
The Case: 1099 Work and Tax Advantage
A few extra 1099 shifts can create self-employment income alongside a hospital job. That may make an owner-only retirement plan available. It also creates another set of contribution limits to coordinate.
Meet Bob and Cathy, two hypothetical CRNAs, age 35, each earning $215,000 in W-2 wages and $35,000 in net 1099 income. For this illustration, we assume a 23.8% federal tax rate on the taxable account’s gains when the money is withdrawn in retirement: 20% capital gains tax plus 3.8% net investment income tax. That is an assumption about the eventual withdrawal, not a tax bracket automatically created by the income shown here. Their actual rate could be lower.
The Strategy: Creative Utilization of 1099 Income
Both make the basic $20,500 employee deferral to their workplace plan in 2022. We assume they have enough eligible compensation and remaining annual-additions capacity for the contribution below. If the workplace plan is a 403(b), employer contributions and the owned Solo 401(k) must also be checked together.
What could they do with additional money they have decided to invest for retirement?
Cathy: Roth IRA
Cathy establishes a Solo 401(k) that permits voluntary after-tax contributions and the rollover needed for this strategy. She contributes an assumed $33,688 of after-tax money and promptly rolls it into a Roth IRA. That is the mega-backdoor Roth strategy. The $33,688 is an illustration, not a calculated maximum for everyone earning $35,000 from 1099 work. At an assumed constant 8% annual return for 30 years, it grows to $338,991.
Bob: taxable account
Bob invests the same assumed $33,688 in a taxable brokerage account for the same 30 years. We use the same 8% return before any taxes, fees, or expenses. He owes tax on the gains when he sells in this simplified example.
His illustrated balance also reaches $338,991 before the final sale. A taxable account offers different access and flexibility, which can matter for money needed before retirement.
The Outcome: A Tale of Two Tax Liabilities
At retirement, both sell their investments. Under the assumed 23.8% tax rate, Bob’s gain produces about $72,662 in federal tax. Cathy’s illustrated Roth IRA withdrawal is tax-free only if it meets the qualified-distribution rules, including the age and five-year requirements.
Bob’s illustrated tax = ($338,991 − $33,688) × 23.8% = approximately $72,662. The rate combines the assumed capital-gains tax and net investment income tax.
The illustration shows how account tax treatment can matter over time. The return, tax rate, and withdrawal assumptions drive the result.
This simplified example assumes a constant 8% annual return, one withdrawal after 30 years, and no fees, state taxes, or annual taxes on dividends and distributions. It is not a forecast. See the IRS Roth withdrawal rules.
Here is the useful takeaway: 1099 income can open another door for retirement savings. Whether to use it depends on cash reserves, debt, taxes, plan costs, and how long you can leave the money invested. A deductible contribution or taxable account may be the better fit for part of your savings.
Frequently Asked Questions (FAQ)
What is a Solo 401(k) and how does it differ from a traditional 401(k)?
A Solo 401(k) is a 401(k) for an owner-only business, which can include an eligible working spouse. You can contribute as employee and employer, subject to the applicable limits. It does not create a higher statutory limit merely because it is called Solo. Eligible employees can change the requirements. IRS one-participant plan guidance.
What is a Mega-Backdoor Roth IRA?
It uses voluntary after-tax contributions to a 401(k), followed by an eligible Roth conversion or rollover. These are different from Roth salary deferrals and do not generate an income-tax deduction. Earnings before conversion generally remain taxable if converted. The plan must allow the contribution and distribution features. IRS after-tax rollover guidance.
Are there any risks involved in the Mega-Backdoor Roth IRA strategy?
Yes, there are some risks, including legislative changes that could alter the rules, the possibility of incurring taxes during the rollover process if not done correctly, and the potential for penalties if withdrawals are made from the Roth IRA before age 59½.
Contribution limits: the 403(b) detail you don’t want to miss.
For 2026, the basic employee deferral limit is $24,500. That is generally one shared limit across your 401(k) and 403(b) plans. The general annual-additions ceiling is $72,000, before eligible catch-up contributions, and compensation can reduce your available room. Employee deferrals, employer contributions, and voluntary after-tax contributions count toward that total. IRS 2026 limits.
If you participate in a hospital 403(b) and control the business sponsoring your Solo 401(k), generally through more than 50% ownership, a special rule combines contributions to both plans for the annual-additions limit. Hospital employer contributions count too. You must satisfy the applicable limits separately and together. IRS 403(b) aggregation guidance.
An unrelated employer’s 401(k) generally works differently for that overall limit, although the employee deferral limit is still shared. Have your administrator reconcile income, contributions, and business ownership connections before funding. Opening a second account does not create a second set of every limit.
The Pros and Cons of Mega-Backdoor Roth IRA Contributions
Before jumping into the Mega-Backdoor Roth IRA strategy, it’s vital to weigh the pros and cons.
Pros:
- Tax-Free Growth and Withdrawals: The main advantage of the Mega-Backdoor Roth IRA strategy is the tax-free growth and withdrawals in retirement, as highlighted in our case study with Cathy. This strategy allows for significant potential tax savings, particularly for high earners.
- Higher Contribution Limits: This strategy also offers higher contribution limits than regular IRAs, allowing you to potentially save much more for retirement.
- No Required Minimum Distributions: Roth IRAs do not require withdrawals during the original owner’s lifetime. Designated Roth 401(k) and 403(b) accounts also no longer require lifetime RMDs for the owner. Beneficiary rules differ.
Cons:
- Complexity: The steps depend on whether after-tax money is converted within the plan or rolled into a Roth IRA. Plan terms, eligible amounts, and the tax treatment of any earnings need review.
- Legislative Risk: The rules for this strategy could change in the future, potentially impacting your retirement savings strategy.
- Tax Implications: If not executed correctly, the rollover process could incur unexpected tax liabilities.
- Availability: The plan must permit voluntary after-tax contributions and either an eligible in-plan Roth conversion or a distribution that can be rolled into a Roth IRA. Not every plan offers these features.
Does your 1099 work create room for this?
We can review your workplace plan, business income, Solo 401(k) documents, and savings goals together. Review our process and services and pricing to see whether On Point fits what you need. Still getting organized? Start with the Free Checkup.
Hypothetical educational example. Results and tax treatment depend on your circumstances. Investing involves risk, including loss of principal.