A Solo Roth 401(k) is a retirement savings plan tailored for self-employed individuals and small business owners without full-time employees, except for a spouse. This plan combines the high contribution limits of a traditional Solo 401(k) with the tax-free growth and withdrawal benefits of a Roth account.
Key Features:
• Eligibility: Designed for self-employed individuals or small business owners with no full-time employees, other than a spouse.
• Contribution Limits: For 2024, you can contribute up to $23,000 as an employee. Additionally, as the employer, you can contribute up to 25% of your net earnings, with the total contributions not exceeding $69,000.
• Tax Treatment: Contributions are made with after-tax dollars, allowing for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met.
• Catch-Up Contributions: If you’re 50 or older, you can make an additional catch-up contribution of $7,500, increasing your total contribution limit.
Advantages:
• Tax-Free Withdrawals: Qualified distributions are tax-free, which can be beneficial if you anticipate being in a higher tax bracket during retirement.
• High Contribution Limits: Allows for substantial retirement savings, combining both employee and employer contributions.
• Flexibility: You can choose to split contributions between Roth (after-tax) and traditional (pre-tax) accounts, depending on your tax strategy.
Considerations:
• Administrative Responsibilities: Solo 401(k) plans may have more administrative responsibilities compared to other retirement plans, especially as your account balance grows.
• Required Minimum Distributions (RMDs): Starting in 2024, Roth 401(k) accounts, including Solo Roth 401(k)s, are exempt from RMDs, allowing your investments to grow tax-free for a longer period.
Establishing a Solo Roth 401(k) can be a strategic move to maximize retirement savings with the benefit of tax-free income in retirement. It’s advisable to consult with a financial advisor or tax professional to ensure it aligns with your financial goals and to navigate the setup process effectively.