Roth Solo 401(k)
The Roth Solo 401(k) is not a separate type of account. Rather, it is an amendment to an existing Solo 401(k). The amendment allows the business owner to earmark contributions as Roth contributions, which they then are responsible for keeping track of. This Roth component of the Solo 401(k) combines the enhanced contribution limits of the Solo 401(k) with the tax advantages of the Roth IRA.
Unlike a Roth IRA, however, Roth contributions to a Solo 401(k) are not subject to any income limits. The business owner can contribute three times as much
to a Solo 401(k) than a Roth IRA. In fact, if the business owner is more than 50 years old and had maximized contributions into a Roth IRA, the Roth component of the Solo 401(k) could be used to put away up to $25,000 per year, or up to $50,000 if the owner is married to a working eligible spouse.
Business owners should be aware that contribution limits, whether
to the Solo 401(k) or the Roth Solo 401(k) component, are counted in the aggregate. The limits indicated are for the entire Solo 401(k). Exceeding the allowable limits for each component is not permitted.
Important: The five-year holding period on Roth contributions starts on the date of the Roth IRA opening, not the first day of the Roth contributions to the Solo 401(k). To get the full benefit of making Roth contributions, business owners also may want to open and fund a Roth IRA at the time they begin making Roth contributions to the Roth Solo 401(k).
For more information about opening a Roth IRA, click here.
The Roth Solo 401(k) is scheduled to expire in 2010.
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