Solo Roth 401k

What is a Solo Roth 401k?

Participants in a Solo 401k can elect to make after-tax or Roth contributions with the salary deferral portion of the Solo 401k. The 2009 salary deferral contribution is $16,500 or $22,000 if age 50 or older ($15,500 and $20,500 if age 50+ in 2008). If a participant elects to make Solo Roth 401k contributions then the salary deferral contribution is not tax deductible, but withdrawals are tax free after age 59 provided the "five year rule" is satisfied.

What is the “five-year rule” and when can I withdraw from my designated Solo Roth 401k?

Assets may be withdrawn tax-free from a Solo Roth 401k provided the Roth 401k account has been established for five or more years and you are age 59 1/2 or older. The 5-year holding period begins with the first contribution to a Roth 401k account.

An exception to the age 59 1/2 rule occurs in the event of disability or death. If you should become disabled, you may be able to access your Roth 401k assets tax free prior to age 59 ½ and prior to satisfying the 5 year rule.  In the case of death, the Roth 401k assets are tax free to your heirs.

How much can I contribute to a Solo Roth 401k and how is it calculated?

Annual Solo 401k contributions consist of two parts 1) a salary deferral contribution and 2) a profit sharing contribution.

1. Roth 401k Salary Deferral
   Participants in a Solo 401k can elect to make Roth 401k contributions only with the salary deferral portion of the Solo 401k. In 2009 the Roth 401k salary deferral contribution limit is $16,500 ($22,000 if age 50 or older). Solo Roth 401k salary deferral contributions are not tax deductible, but withdrawals are tax free after age 59 provided the 5 year rule is satisfied.
    
2. Profit Sharing
   A profit sharing contribution of up to 25% of compensation can also be made into a Solo 401k. The profit sharing portion of the Solo 401k contribution is not eligible to be made as a Roth contribution. Profit sharing contributions are made pre-tax and are tax deductible.

Note: The combined 2009 salary deferral and profit sharing contributions in a Solo 401k cannot exceed $49,000 or $54,500 if age 50 or older ($46,000 and $51,000 if age 50 or older for 2008).

Roth 401k versus Traditional 401k comparison

Solo 401k salary deferral contributions can be made as Roth 401k (after tax) or Traditional 401k (pre-tax).

The basic difference between a Roth 401k and a Traditional 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement. As a result, the choice between the two 401k options comes down to whether you believe your income taxes rates will be higher or lower in retirement.

This chart compares the features of both salary deferral options.

Who is best suited for a Solo Roth 401k?

The Roth 401k is useful for a wide variety of people and scenarios. Learn more about who is best suited for a Solo Roth 401k.

   Need Help or Advice?  |  Open a Solo 401k

Disclosures:

*  The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.