Small Business Owners to Benefit from Solo Roth 401(k)
Back in 2006, Congress put into law the Roth 401(k). This gave 401(k) plans the same benefits of the already-established Roth IRA. Five years prior, the Economic Growth and Tax Relief Reconciliation Act of 2001 made it so self-employed individuals could start their own 401(k) plan.
This became popularly known as the Solo 401(k) or Individual 401(k) retirement plan. Merge the two together to get the Roth Solo 401(k).
Here, we’ll talk about the Solo Roth 401(k) benefits for small business owners (and self-employed individuals).
Solo 401(k) Eligibility Requirements
To be eligible for any type of Solo 401(k) plan, you must adhere to two rules. First, you must have self-employment income. This income can either come from a business you own or from so-called “gig” jobs.
Gigs can vary from consulting jobs to freelancing to Uber driving.
Second eligibility requirement is the absence of full-time employees (other than a spouse or business partner). You can have contract workers and part-timers work for your business. However, any employee over age 21 who works more than 1,000 hours during the year, becomes eligible for the 401(k) plan. If and when this happens, you can no longer utilize a Solo 401(k).
Why Establish a Solo 401(k)?
The main reason for establishing a Solo 401(k) is because you don’t have access to a workplace plan. Moreover, a Solo 401(k) has the highest contribution limits for any type of retirement plan.
For 2019, you may contribute up to a total of $56,000 ($62,000 if age 50 or older). Compare that to the 2019 IRA contribution limits of $6,000/$7,000.
When you establish A Solo 401(k) at the right provider (such as IRA Financial), this also allows for alternate asset investing. Alternative assets include real estate and precious metals. The ability to invest in alternative assets, as well as traditional assets, like stocks and mutual funds, helps you better diversify your retirement portfolio.
A Roth account will help, as well, which we will discuss shortly.
Contributing as much as you are able to and being completely diversified are the two keys of a great retirement game plan.
How Do Small Business Owners Benefit from Roth Solo 401(k) Plans?
As we mentioned earlier, the Roth Solo 401(k) combines arguably the two best retirement plans: the Roth IRA and the Solo 401(k). What makes the Roth option so appealing is that all distributions from the plan are tax-free.
You fund traditional plans are with pre-tax money, which gives you an upfront tax deduction. However, anything you withdraw from the account will be taxed at your current tax rate.
On the other hand, you fund Roth plans with after-tax money. There is no immediate tax-deduction, however all distributions (both contributions and earnings) are tax-free. Wouldn’t it be great if you didn’t have to worry about the “Tax Man” coming after your retirement money during retirement?
The high contribution limits for a Roth Solo 401(k) allows you to invest faster. Imagine if an IRA was your only retirement savings vehicle. It would take you almost ten years(!) to contribute the same amount as with a Solo 401(k).
This is why IRAs are generally funded with rollovers/transfers from other retirement accounts. For example, you accumulate a $100,000 traditional 401(k) throughout your career. You can roll that over into an IRA. However, if you want to invest with a Roth IRA, you will owe taxes on the entire $100,000 rollover balance.
We talked about how a Solo 401(k) could diversify your portfolio. Now, let’s talk about how a Roth will help out as well. There’s always some uncertainty regarding the economy. A big concern is tax rates. You currently know what your tax rate is. However, no one knows what the future holds, both personally and in general.
A Roth, when used in conjunction with a traditional account, can help you play both sides. Use a Roth to pay taxes now and your (known) current rate, then use a traditional plan (401(k), IRA, etc.) and wait to pay taxes later at an (unknown) future rate.
Solo Roth 401(k) Benefits
Another Solo 401(k) Roth benefit is the ability to invest in what you understand. If you’re a real estate guru and can spot a great deal a mile away, why not use your retirement funds to make that investment? Purchase a piece a property with your Roth Solo 401(k) and all earnings will continue to grow in the account until it’s time to start withdrawing (tax-free) funds.
Bonus Benefit: When using leverage to invest in real estate with a Solo 401(k) plan, you are not subject to the UDFI/UBTI rules.
If real estate is not your thing, you can invest in just about anything you can dream of. Precious metals, tax liens, crowdfunding, peer to peer lending, cryptos, private business investments…the list goes on and on!
Is the Roth Solo 401(k) Plan Right for You?
We can’t speak for all small business owners/self-employed individuals, but the Roth Solo 401(k) might be the best plan out there.
High Contribution Limits? Check.
Tax-Free Distributions? Check.
Alternate asset investing? Check.
The Roth Solo 401(k) retirement plan certainly seems to check all the appropriate boxes.
Let’s briefly smmarize the Solo Roth 401(k) Benefits you can experience:
- Solo 401(k) benefits
- High contributions
- Ability to invest in asset classes you know
- Designed specifically for you – self-employed and small business owners
- Tax and penalty-free loan
- Roth IRA benefits
- Tax-free gains when you take a distribution
- Helps diversify your retirement portfolio
When combined, you certainly grow your retirement faster.
Get in Touch
Are you still not convinced of the Solo Roth 401(k) benefits and whether it’s the right plan for you? Speak with one of the many Roth Solo 401(k) experts at IRA Financial. Call us directly at 800-472-0646. Or you can fill out the form and speak with a specialist today.