Roth Solo 401(k)

So-called Roth Solo 401(k) plans are becoming more popular.  The reason I say “so-called” is that it really a marketing term that seems to suggest that it is a “different” or “special” type of 401(k) plan.  The promoters often suggest that they “have” this new plan.  Is the plan “different”….well, yes.  “Special”…definitely.  But, it is “different” and “special” because of what they allow you to do, not that it is a “new” type of 401(k) plan.

Bottom line:  work with a self-directed 401(k) company that can prepare your plan documents to permit this option.  Believe it or not, while the ability to make Roth contributions has been around for nearly 10 years, there are companies who do not have the option or choose not to make it available as part of their plan documents.  You, as the Trustee of the plan, can certainly include this as an option.   And, while we are the subject of Roth contributions, in my humble opinion, including this option should not need to cost you additional fees.   You may be surprised that some self-directed companies charge you an additional fee to establish the plan with the Roth contribution options.  Why is there a fee?  Good question.  There is little additional work to include Roth contributions as a plan option.  So, why the additional fee?

What is a Roth Solo 401(k)?

Provided your plan documents permit, the participant can make elective deferral contributions to their Solo 401(k) plan.  These elective deferrals can be made in both a pre-tax and/or Roth (after-tax) basis.  In fact, your plan documents can be designed to permit Roth conversions of pre-taxed funds within the plan as well.

Roth contributions for the self-employed individual come from self-employment earning.   Under 2015 IRS regulations, an individual under the age of 50 can make elective deferrals in the amount of $18,000, while an individual over the age of 50 can make elective deferrals up to $24,000 (which includes the $6,000 “catch-up” contribution).   These heightened amounts are certainly more advantageous to the qualified Solo 401(k) candidate than the Roth contribution limits of a Roth IRA ($5,500/under the age of 50 and $6,500/over the age of 50).   And, it is certainly more advantageous than the SEP-IRA which does not permit Roth contributions.

Solo 401(k) Plan Design

Since your plan can be designed to permit Roth contributions, you merely need to work with a plan document sponsor which will design your plan documents accordingly.  And, it is very important that, as Trustee, it is vital that you comply with IRS requirements and keep Roth funds in a separate Roth-designated account within the 401(k) plan.

Keep in mind that an IRA Services Solo 401(k) will be:

  1. One of the most competitively priced Solo 401(k) plan options available;
  2. Structured to permit you options for establishment, operation and housing of your 401(k) account(s);
  3. Designed to permit your plan and its participant(s) the option of Roth contributions at no extra fees; and,
  4. Assist you in establishing your 401(k) account with its Roth-designated account;