According to the Americas Trucking Association, America’s trucking industry is the lifeblood of the U.S. economy. In fact, nearly every good consumed in the U.S. is put on a truck at some point. As a result, “the trucking industry hauled 72.5% of all freight transported in the United States in 2019, equating to 11.84 billion tons.”
- Truckers are the lifeblood of America
- Owner operator truckers have the most flexibility
- Independent truckers should consider the Solo 401(k) for their retirement savings
There is a growing trend in the trucking industry to hire truckers as independent contractors versus employees of the trucking company. In other words, truck drivers are frequently owner-operators of their own freelance trucking business and are therefore considered independent contractors. An owner-operator has the truck and has control over the type of trucking jobs it takes. Owner operator truckers are essentially free agent truckers who have greater control over their hauls and schedule.
Most trucking companies have an employment contract with their truckers that describes whether they are considered an employee or independent contractor. This classification is essential for IRS purposes, and each classification comes with its own benefits. The classification comes down to W2 Employees or 1099 Workers (independent contractors) for taxes and the IRS. Both of these represent two forms that relate to the earnings you make from your employment.
Advantages of Being an Independent Contractor
1099 independent contractors do not receive the same benefits as an employee, such as health care. Although, being classified as a 1099 worker has its own benefits. There are many advantages to working as an independent contractor, such as:
A 1099 independent contractor provides one with more flexibility with the type of work one does, as well as with work-life balance. An independent contractor can select the jobs they want to work on and how many hours they want to work. Basically, an independent trucker can work whenever they want, however many hours and days they want, and wherever you want.
As a 1099 worker, a trucker can get paid more than a W2 employee. An independent trucker may also have the ability to set their own prices and rates for each contract and delivery. A trucker that is operating as a 1099 independent contractor, is basically operating their own business rather than serving as an employee.
Superior Retirement Plan Options
One of the biggest advantages of being your own boss and choosing to be an owner operator trucker is that you can take advantage of one of the most powerful retirement tools available – the Solo 401k) plan.
A 401(k) Plan is an IRS approved qualified retirement plan. As the name suggests, the Solo 401(k) plan is an IRS-approved qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. Hence, any owner-operator trucker who is self-employed and does not have any employees that work more than 1000 hours annually, excluding a spouse or partner, can set-up a Solo 401(k) plan.
Why Should a Trucker Choose a Solo 401(k) Plan?
- Put away up to $67,500 a year in pretax or Roth. In 2022, the maximum one can contribute to an IRA is $6,000 (with a $1,000 additional “catch up” contribution for those age 50+). The Solo 401(k) annual contribution limit is $61,000, with an additional $6,500 catch-up contribution for those at least age 50. In addition, if your spouse generates compensation from the business, he or she can also make high contributions to the plan.
Based on the 2022 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $20,500. That amount can be made in pretax or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to the combined maximum for the year, including the employee deferral, of $61,000.
For plan participants who are at least age 50, an individual can make a maximum employee deferral contribution in the amount of $27,000. Again, that amount can be made in pretax or Roth funds. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to the combined maximum for the year, including the employee deferral, of $67,500.
- Borrow up to $50,000 tax-free for any purpose. An IRA, including the popular SEP IRA, does not allow one to borrow even one penny from the plan. However, assuming the plan documents allow for it, a Solo 401(k) participant can borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose! The best part is the interest rate. The lowest interest rate is Prime for the loan, which is 5.50% as of August 30, 2022. This is way lower than any bank loan you may receive.
This offers a Solo 401(k) plan participant the ability to access up to $50,000 to use for any purpose, including paying personal debt or funding a business. In fact, you can use the loan to help buy a truck or even finance your trucking business. Best of all, the loan option will allow you to have tax- and penalty-free use of the funds, and the loan payments go back to your plan instead of a bank or a credit card company. Hence, you can use your 401(k) funds for personal or business purposes and instead of paying back a with credit card company you are paying your plan back, with interest.
- Self-Directed investment options. IRA Financial is one of the few companies that offer Solo 401(k) plans with self-directed investment options, including real estate, private placements, precious metals, cryptocurrency, tax liens, investment funds, private business investments, and much more. The Internal Revenue Code does not describe what a Solo 401(k) can invest in, only what it cannot invest in. Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. In general, if the self-directed Solo 401(k) does not purchase collectibles or engage in a prohibited transaction outlined in Code Section 4975, then the investment can be made!
Having the ability to invest in alternative asset investments with a Solo 401(k) plan can provide truckers with the ability to better diversify their retirement assets as well gain the opportunity to invest in a wide variety of investments. Best of all, all income and gains generated by the Solo 401(k) plan will go back to the plan without tax. This is known as tax-deferral.
- Use leverage to buy real estate with no tax. For truckers that are interested in using a retirement funds to invest in real estate, the Solo 401(k) plan offers participants the ability to invest in real estate and use a non-recourse loan without triggering the Unrelated Debt Financed Income (UDFI) tax. UDFI is a type of Unrelated Business Taxable Income (UBTI) which, if triggered, could subject the investment to close to a 37% tax for 2022 when using an IRA.
However, a Solo 401(k) plan using nonrecourse financing for a real estate investment is exempt from the UDFI tax (Internal Revenue Code Section 514(c)(9).
Being an owner operator trucker has so many financial and work-life benefits. In addition, being a self-employed trucker allows one to take advantage of the most powerful retirement plan – the Solo 401(k). With a Solo 401k), an owner-operator trucker can maximize his or her tax deductions, while at the same time gaining investment diversification, as well as the ability to borrow up to $50,000 to use for any purpose, including starting or financing a trucking business.