It is not widely known that one can make Roth or after-tax contributions to a 401(k) or Roth Solo 401K Plan.
Under the 2002 Economic Growth Tax Relief Reconciliation Act of 2001, a Roth designated contribution program for 401(k) or for 403(b) plans. Solo 401K plan participants may designate all or portion of their salary reduction plan contributions as Roth contributions, which are treated as after-tax contributions. However, since the Roth funds are after-tax funds, the earnings will grow tax-free as long as they are distributed as part of a qualified distribution.
In addition to making Roth 401K contributions, which if one is under the age of 50 is $165,500 for 2011 and $22,,000 for those over the age of 50, one can also make Roth IRA Contributions. With respect to Roth IRA contributions, for an individual under the age of 50, the maximum Roth IRA contribution is $5000 and for those over the age of 50 the maximum Roth IRA contribution is $6,000. Thus, by establishing a Solo 401(k) Plan, also known as an Individual 401K or Self Directed 401K Plan, an individual under the age of 50 can make total Roth contributions of $21,500 ($16,500 for the Roth 401(k) contribution and $5,000 for the Roth IRA contribution) for 2011 and for those above the age of 50, $28,000 ($22,000 for Roth 401(k) contributions and $6,000 for Roth IRA contributions).
Therefore, using a Solo 401K, will allow one to make high pre-tax as well as Roth contributions, in addition to being able to borrow $50,000 or 50% of one account value while gaining the ability to make traditional as well as non-traditional investments such as real estate tax-free and without custodian consent. The Solo 401K Plan was designed specifically for the self-employed or the small business owner with no employees and offers far more advantages than an IRA, SEP IRA, or SIMPLE IRA.