A Roth Solo 401(k) is a retirement savings plan tailored for self-employed individuals, such as sole proprietors, who have no employees other than a spouse. This plan combines the high contribution limits of a Solo 401(k) with the tax advantages of a Roth account.
Key Features:
• Tax Treatment: Contributions are made with after-tax dollars, meaning they don’t reduce your taxable income in the year they’re made. However, qualified withdrawals during retirement are tax-free, including both contributions and investment earnings.
• 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 from self-employment, with total contributions capped at $69,000. If you’re 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total to $76,500.
• Eligibility: Designed for self-employed individuals with no employees other than a spouse.
• Investment Options: Offers a wide range of investment choices, including stocks, bonds, mutual funds, and real estate, depending on the plan provider.
Benefits:
• Tax-Free Growth: Since contributions are made with after-tax dollars, all qualified withdrawals in retirement are tax-free, which can be advantageous if you anticipate being in a higher tax bracket during retirement.
• High Contribution Limits: Allows for substantial retirement savings, especially beneficial for those looking to maximize their retirement contributions.
• Loan Provision: Some plans permit borrowing up to 50% of the account balance or $50,000, whichever is less.
Considerations:
• No Immediate Tax Deduction: Unlike traditional Solo 401(k) contributions, Roth contributions don’t reduce your current taxable income.
• Plan Setup and Administration: Establishing and maintaining a Solo 401(k) can be more complex compared to other retirement plans like a SEP IRA.
When deciding between a traditional and Roth Solo 401(k), consider your current and expected future tax brackets. If you expect to be in a higher tax bracket during retirement, a Roth Solo 401(k) might be more beneficial. It’s advisable to consult with a financial advisor or tax professional to determine the best strategy for your individual circumstances.