A Solo 401(k) is the best retirement plan for self-employed entrepreneurs who have no employees, other than potentially a spouse.

The ability to contribute to a tax-sheltered account as both employer and employee allows business owners under 50 years old savings in 2024 of up to $69,000; those age 50 or older can save up to $76,500.

If you plan to be in a higher tax bracket during retirement or you’re worried about future tax increases in general, a Roth Solo 401(k) is your best bet, as you’re able to pay taxes on the money the year you make the contribution, so you can take it out tax-free during retirement.

Benefits of a Roth Solo 401(k)

Generally speaking, entrepreneurs like Solo 401(k)s for a number of reasons:

  • Eligibility
  • Anyone can contribute to a 401(k), with no income limits. By contrast, you cannot make more than $138,000 to make a full contribution to a Roth IRA. If you’re filing jointly with a spouse, you’re allowed a modified Adjustable Gross Income of up to $218,000.
  • High limits
  • The $69,000 or $76,500 savings ceiling of a 401(k) plan is much higher than the $7,000-$8,000 you are able to save with a Roth IRA. This benefit is the same whether you choose a Roth or traditional 401(k).
  • Investment choices
  • This type of plan lets you choose from virtually unlimited investment options, tax-free. You can invest in real estate, tax liens, private businesses, and precious metals, as well as traditional stocks, bonds, and mutual funds.
  • Loan options
  • IRAs do not allow you to take a loan out from your account, but you can borrow the lesser of $50,000 or 50% of your account value from a Roth Solo 401(k). You can use the loan for any purpose at a low-interest rate. Whether you want to invest in your business, pay off a personal debt, or buy a new car, the opportunity is yours.
  • Cost-effective administration
  • Solo 401(k)s are easy to operate. There aren’t multiple accounts to juggle or nondiscrimination testing, since it’s just you and no other employees. There is also no annual filing requirement until your account assets exceed $250,000. Even then, you can fill out a basic Form 5500-EZ. The cost of a Solo 401(k), Roth or traditional, is very affordable –especially when you choose a plan provider with a flat, monthly rate like Ubiquity. You can get started with us for as little as $19/month.

Beyond that, choosing to make your plan Roth comes with the following perk:

  • Tax-free distributions
  • All income and gains earned from the 401(k) plan are tax-free. You’ll never have to pay tax on the money you take out during retirement because you’ve already paid it. This can be a great way to pass money on to your heirs.

The combination of benefits can make a Roth Solo 401(k) the right option for your situation.

How much can you gain from a Roth Solo 401(k)?

How much you gain from a Roth Solo 401(k) depends upon the types of investments you make and how well they perform over time, but even depositing a modest amount can lead to large profits down the road. For instance, starting a plan at age 20 and contributing just $3,000 a year until age 65 can lead to $2.5 million by retirement time, assuming a 9.88% annual compound growth rate in stocks.

When can you take money out of a Roth Solo 401(k)?

You must be at least 59.5 years old and have had the account for five or more years to withdraw tax-free money. Nonqualified withdrawals are subject to a 10% penalty. Like any 401(k), there is a required minimum distribution at age 72. To avoid the distribution requirement, you might roll those Roth Solo 401(k) funds out to a Roth IRA.

To learn more about setting up a Roth Solo 401(k), contact Ubiquity today!