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How Self-Employed People can Save with a Roth Solo 401(k)

How Self-Employed People can Save with a Roth Solo 401(k)

September 21, 2021

How do you put money aside for retirement when you’re self-employed?

Roth Solo 401(k): Tax-Free Retirement Income

One approach to consider is a Roth Solo 401(k). It may allow you to create tax-free retirement income.

You’re thinking about the future, and you realize you need to ramp up your retirement savings. The challenge is some retirement plans have low annual contribution limits.

Now, take a look at the Roth Solo 401(k). This retirement plan offers you a chance to save more for retirement than you could in an ordinary 401(k), with the potential for tax-free income down the road.

How to Qualify for a Roth Solo 401(k)

To qualify for the tax-free and penalty-free withdrawal of earnings, Roth Solo 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. Any employer match is pretax and not distributed tax-free
during retirement.

Roth Solo 401(k)s are designed for the smallest businesses. They can have only one or two participants: a business owner, and a business owner’s spouse (provided the spouse works for the business). Accountants, architects, consultants, lawyers, real estate professionals – these are just some of the types of solopreneurs who may quality for Roth Solo 401(k)s.1

Look at how much you can potentially save for retirement with a Roth Solo 401(k):
Annual contribution limit, traditional 401(k): $19,500 ($26,000 if age 50 or older).
Annual contribution limit, Roth Solo 401(k): $58,000 ($64,500 if age 50 or older).2,3

Yearly Contribution Limits for Roth Solo 401(k)

Imagine putting more than $50,000 toward your retirement in 2021. With a Roth Solo 401(k), it may be possible. Why does the Internal Revenue Service allow such high yearly contribution limits on these plans? It is because you can contribute to a Roth Solo 401(k) in two ways. You can make an employee contribution, and you can also make a profitsharing contribution as an employer.3

Your total contribution to a Roth Solo 401(k) for 2021 is capped at $58,000 ($64,500 if you will be 50 or older in 2021). That is to say, your total employee and employer contributions for the year cannot exceed these annual limits.3

Now imagine the tax-free income stream that a Roth Solo 401(k) might produce. A distribution from a Roth retirement plan will come out of the plan tax-free and penalty-free, as long as you follow I.R.S. rules.4

These plans can be simpler to run than other 401(k) plans. While it’s recommended that you keep records of contributions, deferrals, and investment performance, you may not have to file regulatory documents until assets reach $250,000.

Can you have a Roth Solo 401(k) if you have an LLC? Yes. You can also have a corporation or a partnership and have one. Your business entity doesn’t matter, what matters is that your business must have only one or two employees (as noted above).5

Getting Started with a Roth Solo 401(k)

If you need to save more for retirement, the Solo Roth 401(k) may be just the retirement plan choice for you. Call us and ask about how you can create a Solo Roth 401(k) for your business.

Read more: The Solo 401(k)

Keep in mind that this article is for informational purposes only. It’s not a replacement for real-life advice, so make certain to contact your tax, legal or financial professional before making any changes to your retirement strategy.

1. Investopedia, November 9, 2020
2. Internal Revenue Service, November 10, 2020
3. Internal Revenue Service, November 13, 2020
4. Investopedia, November 9, 2020
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