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Maximizing Roth Contributions if You Are Self-Employed

Maximizing Roth Contributions if You Are Self-Employed

Being self-employed today has many benefits.  One of the biggest advantages is the control you have over your work-life balance. You can decide what you will do and when you do it. You are your own boss! Today is easier than ever to be self-employed with shared office space and online business tools; being self-employed is more attainable than ever.

In the past, one of the reasons some stayed employed was to secure health insurance.  Now, with the Affordable Healthcare Act, anyone can secure their own health insurance even if they do not work for a large business. Almost as important and often forgotten about, being self-employed will provide you with significant Roth options for your retirement savings that will surpass anything available via an employer.  This article will explore the ways a self-employed individual or small business owner with no full-time employee can maximize Roth contributions.

Key Points
  • Being self-employed comes with unique benefits and opportunities, both personally and financially
  • Choosing the right retirement plan is your responsibility and should be carefully considered
  • A major benefit is the ability to supersize your tax-free retirement via a Roth Solo 401(k) plan

The Roth IRA

The Taxpayer Relief Act of 1997 introduced the Roth IRA which was named after the late Senator Roth of Delaware who came up with the idea of this unique retirement plan. The Roth IRA is an after-tax plan which allows anyone with earned income under a set income threshold (under $153,000 if single and $228,000 if married and file jointly for 2023) to make after-tax contributions up to $6,500 (or $7,500 if you are at least age 50) to the plan.

The primary advantage of a Roth IRA is that once the plan has been opened for at least five years and you reach the age of 59 1/2, all distributions are tax-free! As an added incentive, all contributions made to the plan can be withdrawn at any time without tax or penalty. Many have used the Roth as an emergency fund because of this.

The Solo 401(k)

The Solo 401(k), also known as the Individual 401(k), is a type of retirement account for self-employed individuals. It can be a great way to boost your retirement savings and has become the most popular retirement plan for the self-employed.

To be eligible to benefit from the Solo 401(k) plan, a business must meet just two eligibility requirements:

  1. The presence of self-employment activity.
  2. The absence of full-time employees.

Assuming you are eligible, the plan allows for the highest annual contribution limits (up to $66,000 or $73,500 if at least age 50), loan features, Roth options, and most importantly, the ability to self-direct your investments.

The plan can be established up until the business files its tax return, including extensions.  Hence, if a sole proprietor filed an extension, a Solo 401(k) plan can be technically established up until October 15 and make plan contributions for the prior year. 

Employee deferrals can be made in pretax or Roth, but employer contributions must be made in pretax, although can be converted to Roth, subject to income tax.

Beginning in 2023, SECURE Act 2 now allows for employer matching contributions to also be made in Roth. Matching contributions are a percentage of the amount contributed, while profit sharing contribution is a percentage of the amount earned by the plan participant.  Not all plans include an employer matching contribution, so it is important to confirm that the plan you are using does.

Mega Backdoor Roth Solo 401(k)

The “Mega Backdoor” Roth Solo 401(k) plan strategy is the best option available for a plan participant seeking to maximize annual Roth contributions. Basically, it’s a super-sized Backdoor Roth IRA but with no limitation on conversions if the plan participant also has pretax funds. 

The strategy will allow one to make dollar-for-dollar after-tax contributions to the plan up to the annual limit, but is generally only available for Solo 401(k) plans since they are not subject to various ERISA annual plan testing rules which limits its potential use for traditional 401(k) plans. Once the contribution is made, it can be immediately converted to Roth.

The SEP Roth IRA Option

A SEP IRA is a pure profit-sharing plan that allows the employer to make up to a 25% (20% in the case of a sole proprietorship of single member LLC) profit sharing contribution to all eligible employees up to a maximum of $66,000 for 2023. The plan does not include a catch-up contribution option.

Prior to 2023, SEP IRAs generally can receive only employer contributions and generally cannot allow for elective deferrals. Another provision in SECURE Act 2, which was passed in December 2022 as part of the $1.7 trillion-dollar omnibus spending bill, allows SEP and SIMPLE IRAs to be designated as Roth IRAs. An employee must elect for the contributions made by, or on behalf of, the employee to be treated as made to a Roth IRA, based on rules to be established by the IRS. This change should make the SEP IRA a bit more popular with business owners seeking to maximize their Roth contributions. It appears that an employer would not be required to offer the Roth election.

The SEP has long been considered one of the best retirement plan for small business owners who employ full-time employees.


Being self-employed or a small business owner can be one of the most rewarding decisions in your life. The ability to be your own boss and control your schedule is very powerful.  When you couple that with a massive opportunity to boost your Roth savings, the decision to be your own boss should be even easier to make.

Whether you’re a gig worker, freelancer, or own a small business, the ability to supercharge your tax-free retirement savings should be considered thoroughly. We recommend working with a financial advisor who can help decide how to best proceed.


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