Solo 401K Roth Contribution Q&A

What is a Roth Solo 401k Plan? What is a Solo 401k Plan?

Understanding Roth Solo 401(k)s requires that we first understand the basics of traditional Solo 401k plans.

401K Plans, creatively named after Section 401(K) of the Tax Code, are Defined Contribution retirement plan that allows employees to choose (“elective deferral”) to contribute all or part of their compensation to a tax-advantaged account and exclude the amounts contributed from current income. The tax code calls this a “cash or deferred arrangement,” or CODA. A 401k Plan can be combined with other types of plans, such as Defined Benefit and Cash Balance Plans, to maximize tax deductions and allow for multiple forms of plan contributions. The typical 401(k) Plan provides for  employer profit sharing contributions, in addition to employee contributions. Self-Directed Solo 401(k) Plans are 401(k) plans for businesses that don’t have full-time employees other than business owners and their spouses, which can be designed to include very attractive features such as Roth 401k Contributions and After-Tax Employee Contributions.

What is a Roth 401k Plan?

A Roth 401k Plan, governed by Section 402A of the Tax Code, is not a type of plan, but rather a type of account that is available within some 401k plans. These are referred to as Roth 401k Subaccounts, to which employees can make Designated Roth Contributions. To be a Qualified Roth Contribution Program, separate accounts must be established for Designated Roth Contributions and separate record-keeping must be maintained for those.

How Are Solo 401K Designated Roth Contributions Treated For Tax Purposes?

Roth Contributions to a Solo 401k plan are includable in current income for tax purposes, but earnings are not taxed when part of a Qualified Distribution.

What limits apply to Solo 401k Roth contributions?

The contribution limits for Solo 401k Roth contributions are the same as those for tax-deferred contributions, currently $18,000 for those below age 50 and $24,000 for those that are older. $18,000 is the combined limit for pre-tax and Roth contributions.

Can I Make Roth and Pre-Tax Contributions?

Yes, you can make both types of contributions in any year, but the combined amount may not exceed the employee-deferral contribution limits for the year.

How Are Solo 401(k) Roth Contributions made?

Make Solo 401k Roth contributions by opening a designated 401k bank account or brokerage account for Roth contributions.

Can I rollover my 401k Roth contributions to other accounts?

Yes, 401k Roth contributions can be rolled over to (a) another Designated Roth 401k subaccount or to (b) a Roth IRA, only. See Section 402A(a)(3) of the IRC.

Are Solo 401K After-Tax Contributions the same as Solo 401K Roth Contributions?

No, Solo 401K After Tax Contributions are NOT the same as Solo 401k Roth Contributions. Solo 40(k) Roth Contributions are made in lieu of employee elective deferrals and are subject to the employee deferral limits, $18,000 – or $24,000 including catch up contributions for those aged 50 and above. Solo 401k After Tax Contributions are NOT subject to those limits and can be made up to the overall plan contribution limit of $54,000 ($60,000 with catch-up). Earnings and gains on Solo 401k Roth contributions are tax free; earnings and gains on Solo 401K are only tax-deferred, unless the Mega Backdoor Roth Strategy is implemented.

What impact do Roth Accounts have on Solo 401k loans?

To simplify recordkeeping, any Solo 401k loan should be taken from either the Roth subaccount, pre-tax account, but not both.

Checkbook-control Solo 401k plans can invest in alternative assets, including real estate, cryptocurrency, tax liens and deeds, hard money lending, and many others. Use a Self-Directed Solo 401K to combine tax and investment strategy; remember, it’s not what you earn, it’s what you keep.