The Solo Roth 401(k): What Is It and Do I Need One?

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When people hear the word “Roth” they immediately think of an IRA (individual retirement account). The terms "Solo Roth 401(K)" and "Roth Solo 401(k)" are often confusing. They refer to a Solo 401(k) plan with a Roth component. Although the Roth Solo 401(k) combines many of the best aspects of IRAs and 401(k)s, the Solo Roth 401(k) is its own beast.

There are so many products for small business owners that it may be difficult to determine the right product to suit your needs. Simple 401(k), Individual 401(k), Traditional 401(k), safe harbor 401(k), Roth Solo 401(k), self-directed 401(k), to a series of other name variations can be very overwhelming. However, it's important to find the Solo 401(k) account that will yield the greatest gains for your investment strategy.

There are important differences between IRAs and 401(k)s. Knowing what they are and how they can affect your retirement plans will help you to make the right decisions. Here are the top questions regarding these plans to make your research easier.

What is a Solo Roth 401(k)?

A Solo Roth 401(k) is a standard Solo 401(k) with an activated Roth savings function. With this plan type you can have both Roth savings and tax-deferred savings, housed in the same plan. However, the two types of savings are kept in separate accounts for proper recordkeeping. To establish a Solo Roth 401(k), you must be a business with no employees. 

A Solo Roth 401(k) is initially funded by post-tax funds meaning the contribution to the Roth portion does not reduce your taxable income. However, all future gains and distributions are free of tax if certain requirements are met. Some might not like the sound of paying taxes up front but, in the long run, it will pay off, especially for high-yield investments. 

One advantage to having a Solo Roth 401(k) is that there are no earned income limits imposed on the individual making the Solo Roth 401(k) annual contributions for the tax year. For a regular Roth IRA if you file your taxes as a single person your modified adjusted gross income must fall below $139,000, and $206,000 for a married couple filing jointly.

Who is a Solo Roth 401(k) Good For?

The Solo Roth 401(k) is perfect for people who work for themselves and want to accrue tax-free income. These plans are good for business owner(s) and their spouse(s) who works for the business.

Self-employed people can make contributions to the plan as both employer (profit sharing contributions) and employee, contributing to the Roth feature, 401(k) feature, or a combination of the two.

A Solo Roth 401(k) is also good for people that want to put away large annual contributions. These plans also allow for catch up contributions if you are age 50 or older.

Are Solo 401(k) Contributions Tax Deductible?

In a Solo 401(k) plan the contributions you make as an employer will be tax-deductible up to the maximum allowed by IRS for that year. You do not pay taxes on any earnings until you take distributions at retirement.

For the Roth portion of the Solo 401(k) you do not get a tax deduction. However, your distributions at retirement are tax-free.

What are the Disadvantages of a Solo Roth 401(k)?

While there are numerous advantages to having a Solo Roth 401(k), there are a few regulations that might be irksome to some investors. 

  1. You cannot roll over from an existing Roth IRA to your Roth 401(k). However, rollovers from previously existing Roth 401(k)s are allowed to be rolled over to a Roth IRA or another employer’s Roth 401(k) program. 
  2. You cannot change your mind if you want to switch your 401(k) contribution back to a tax-deferred status like you can with an IRA called a recharacterization. 
  3. You must keep really good accounting of the different types of contributions for tax purposes. The contributions to each feature (Roth and Solo k) are taxed differently when you take a distribution. There are only a few online products in the market that do this well.


What is a Self-Managed Account Vs. Self-Directed Account?

Large financial institutions offer a service known as "self-managed". This allows retirement customers to select and oversee their mutual funds, stocks, bonds, and ETFs investments online. These accounts typically do not allow alternative assets. Self-directed accounts are directed by you, the investor, and allow a wider range of assets not allowed in self-managed accounts, like real estate.

These accounts include Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and of course, Solo 401(k)s. They are established and managed through a regulated or approved provider. For an IRA, you need an IRA custodian. To establish a self-directed Solo 401(k) plan, you need an approved provider that allows alternative assets.

While self-directed accounts do give the investor more freedom, they also come with more responsibility. To make informed investment decisions it is crucial that the account holder performs their due diligence. Being savvy about markets is an indispensable part of self-managing your retirement plan. 

What Else Should be Considered?

The laws and regulations that govern various investment products can be very complex. Due diligence is important when considering potential investment opportunities. Part of performing your due diligence should be consulting with accountants, financial advisors, and other financial services professionals.

How Can IRAR Help?

IRAR Trust Company has been providing self-directed IRA and alternative investments for self-employed individuals, small business owners and investors since 1996. Our mission is to provide the best retirement plan options and education to our clients.

Our Solo Roth 401k is also unique in that it allows for alternative investments, meaning that clients can use their retirement savings to invest in assets that are not available through traditional 401k plans. This gives clients the flexibility to diversify their retirement portfolio and potentially maximize their returns with assets they understand. The plan also allows a Roth option if you'd like to add tax-free growth for your retirement savings at no additional cost to you. Learn more about our Solo 401(k) plan.

At IRAR Trust Company, we strive to be your trusted self-directed retirement partner. We pride ourselves on providing excellent client services to help you meet your individual needs.



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