In this post you’ll learn how to use a Solo 401k to get up to $120,000 into Roth retirement accounts (Mega Roth), annually. If you don’t already know the value and power of that – this is a must read. If you already know and appreciate the value of tax-sheltered & tax-free Roth retirement accounts, this post is a must-read.
Roth 401(k)s & Roth IRAs: The value of Tax-Free Roth Money
If you invest in assets that generate high returns you know that Mr. Roth is your best friend. Unlike “traditional” tax deferred contributions to retirement accounts – for which you get a tax deduction up front, but pay your marginal income tax rate upon distribution – Roth contributions are taxable income in the year received, but grow completely tax-free thereafter. Tax-deferred vs. tax-free.
In addition, being that with Roth money the IRS receives their tithe up front, there are no required minimum distributions (RMDs) for Roth IRAs (unless inherited). This gives you complete flexibility with regard to the withdrawal of those funds, allowing them to keep growing tax free and asset protected, indefinitely.
Roth vs. Traditional: Which is better?
There are many factors to consider when choosing whether to make a Roth or traditional contribution to your retirement account. Among those are:
- The value of a current tax deduction
- Expectations regarding future taxation, including (a) your future level of taxable income and (b) future rates of taxation (i.e., will tax rates be higher or lower in the future?)
- The nature of the investment strategy being pursued, the expected returns, and risk factors
Roth vs. Traditional: When Roth is the Clear Winner
If the investment strategy may generate very high returns, Roth is the way to go. Case closed.
When an asset will grow manifold over time, all that growth will be taxable as ordinary income – and will be decimated. With Roth accounts, you pay the tithe upfront on the initial investment and enjoy tax free returns on all the astronomical returns.
Just ask Peter Thiel (PayPal, Yelp). And Mitt Romney (Bain). And Max Levchin (Yelp, Slide). They are among a select group of investors that have IRAs values in the hundreds of millions – $100,000,000+. Unfortunately for Mr. Romney, it appears that he made these incredibly lucrative private equity investments using a pre-tax IRA, using a SEP-IRA account – so all his earnings will eventually be taxed as ordinary income. A Roth IRA would have been incredibly valuable to him, worth at least $50,000,000 in tax savings.
And, yes, you can invest your IRA and Solo 401k in almost any type of investment, including real estate, hard money lending, private placements, notes & mortgages, private equity, precious metals & coins, hedge funds, litigation finance, tax liens & deeds, private lending, Bitcoin & other cryptocurrencies and nearly all alternative assets.
Roth IRAs: The Limitations, the Backdoor Roth IRA, and the Limitations
Roth IRAs are limited to $5,500 annual contribution (plus a $1,000 catch-up for those 50 and older). Furthermore, high earners are ineligible to contribute to Roth IRAs – married filing jointly at $194,000 of adjusted gross income and most other filers at $132,000 of AGI.
A workaround is to use the Backdoor Roth IRA strategy, in which you make contributions to a Traditional IRA and, subsequently, roll those over to a Roth IRA – aka a Roth conversion. There are no income limitations for Roth conversions.
The backdoor Roth IRA is a great strategy – that’s limited to $5,500.
Mega Backdoor Roth: How to Get $54,000-$120,000 of Roth Every Year
The same concepts that are used in for backdoor Roth IRAs are at play in the Mega Backdoor Roth strategy.
Standard 401k vs. Structured Solo 401k
Overall annual contributions to the 401(k) account of any individual are limited to $54,000, or $60,000 for those 50 and older. The standard 401(k) contribution types are (a) employee tax-deductible salary deferral and (b) employer-deductible profit sharing. Employee deferrals are limited to $18,000 (plus a $6k catchup) and employer profit sharing contributions are deductible to the extent they don’t exceed 25% of employee compensation.
The key to the Mega Backdoor Roth are additional features that can be built into a Solo 401k.
Solo 401k plans can be structured to accept 3 types of contributions:
- Pre-tax 401k contributions: These are tax-deductible contributions. These are the types of contributions you’re used to seeing in 401k plans.
- After-tax 401k contributions: These are allowable contributions that exceed the tax-deductible limits and are not Roth contributions. Earnings on these contributions grow tax-deferred; they will be taxable at distribution.
- Roth 401k contributions: These contributions are made on after-tax basis, but are forever tax-free. Solo 401k plans can include a Roth subaccount to which after tax contributions can be made of up to $18,000 per year, which grows tax free like a Roth IRA.
In addition, Solo 401(k) plans can be structured to allow for In-Plan Roth Conversions, which enable you to convert non-Roth funds to Roth status.
Mega Roth 401k Money: Bringing it All Together
- Step 1: Max out nondeductible contributions to your Solo 401k – up to $54,000 for those single and under 50, up to $120,000 for those married and aged 50.
- Step 2: Execute a 401k in-plan Roth conversion on those contributions. Voila! Roth money.
- Step 3: Invest in assets that will throw off great returns – all tax free!
Whether you’d like to invest in real estate, hard money loans, notes, deeds of trust, tax liens, mortgages, precious metals, cryptocurrencies – or even stocks, bonds, & mutual funds – use a ReSure Investor Account to maximize your tax alpha.