To the Men and Women Who Want to
Quit Working One Day: The Solo 401k Plan

Roth Solo 401k

Ride The Roth to Riches ! 

 

Introducing your Roth Solo 401k retirement contribution option

 

Is it Right for You?

Your Solo 401k plan  includes the Roth 401k contribution feature. This option doesn't change how much you can contribute. Nor does it change where you can invest. What it really does is give you more flexibility and more control over when your contributions - and retirement income - will be taxed.

If you choose to contribute under the Roth 401k, those contributions will be subject to income taxes before they're invested in your Roth 401k account.

 

In exchange, though, you may be able to withdraw your contributions and any earnings "tax-free" when you retire ... which could mean more in your retirement paychecks.

 

In short, you'd be trading a current tax benefit for a future tax benefit. So does this trade-off make sense for you? It primarily depends on whether you think your tax rate will be higher at retirement, or vice versa. Let's take a closer look.

 

 

Would You Rather Pay Taxes Later?

 

 

Compare the Traditonal Solo 401k

            

     Now                              Later

 

Pay no income taxes     Pay taxes

 


Pre-tax contributions are deducted from your salary before taxes are taken.

That can reduce your taxable icome and can leave you more in take

home pay.

 

 

Money going in:      Pre-tax contributions are deducted from

(contributions)        your salary before taxes are taken. That

                            can reduce your taxable income and leave

                            you more in your take-home pay.

 

Earnings:                  Grow tax-deferred until withdrawn.

 

Money coming out: Distributions are taxable as withdrawn.

(distributions)

 

Money moving on:  Rollovers allowed to another Traditional

(rollovers)               401(k), 403(b), governmental 457(b), or

                            Traditional IRA.

 

Required minimum   Minimum distributionsrequired

distributions:             beginning at age 701/2.

 

_______________________________________________________________
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Or Get Them out of the Way Now?

with the Roth 401k.


Now:                                 Later:

Pay taxes now             Tax Free   

 

Money going in:         After-tax contributions are subject to federal

(contributions)          (and where applicable, state, and local) income

                              tax withholding.

 

Earnings:                    Grow tax-free as long as certain qualifying

                              conditions are met (see below).

 

Money coming out:   Tax free distributions, as long as you’ve

(distributions)            satisfied the five-year holding

                               period and are age 591/2 or older, disabled

                               or deceased.

 

Money moving on:     Rollovers allowed to another Roth account in a

(rollovers)                 401(k) or Roth IRA.

 

 

Required minimum    Minimum distributions required         distributions:               beginning at age 701/2. However,

                               you can roll over your Roth 401(k)

                                       to a Roth IRA, where minimum  

                                       distributions are not required.

 
 

So, which option is right for you?

 

If you're considering a Roth 401(k), consider the following points in making your decision:

 

  • If you have a high retirement account balance, you may benefit from a Roth Solo 401(k) if you anticipate being in a higher tax bracket during retirement. When you retire, you will NOT have to adjust your distributions from the plan to determine the tax bracket you end up in each year. With the Roth Solo 401(k), you do not need to worry about income taxes on your retirement funds.

 

  • If you plan to retire in five years or less, a shorter time horizon before retirement may limit the benefit of tax-free withdrawals, whereas your account may get a bigger boost from tax-free savings if you plan to continue working for a longer period of time.

 

  • Unlike the Roth IRAs, you are not required to meet income thresholds to participate in a Roth Solo 401(k). Roth IRAs are limited to single taxpayers with less than $114,000 and married couples with less than $181,000 in adjusted gross income. A Roth Solo 401(k) may be a good choice if you desire tax-free withdrawals but your current income exceeds the Roth IRA  limits.

 

  • Roth Solo 401(k) offers the opportunity to roll over funds directly to a Roth IRA, which does not require distributions after age 70 1/2. This oppotunity may increase the potential tax-free growth of your assets and allow you to bequeath a portion of your assets to your heirs.

 

Participants in Solo-k Retirement Group Solo 401(k) plans enjoy both Roth and traditional contributions or a combination of both opportunities.

 

With traditional accounts, withdrawals of pretax contributions and earnings are taxable and may be subject to a 10% early withdrawal penalty if taken before age 59-1/2.

 

Qualified distributions from Roth accounts are tax-and penalty-free if the first Roth contribution was made at least five years before, and if you are at least 59-1/2, or are disabled or have died.

 

For early distributions from Roth accounts, earnings are taxable and may be subject to a 10% early withdrawal penalty.

 

                               HOW THE SOLO ROTH 401K COMPARES

 

 

 

Solo Roth 401k                   

Solo

401k

Roth

IRA

Eligibiliy

All plan participants

All plan participants

*Married couples filing jointly with income up to $181,000

*Single filers with income up to $114,000

Employee

Contributions

$17,500 in

2014   

$17,500 in

2014

$5,500 in

2014

Employee

Contributions

(50 or older)

$23,000 in 2014                    

$2,000 in

2014

$6,500 in

2014

Contribution Tax Treatment

After Tax    

Pre Tax

 After Tax

Distributions Tax Treatment

Tax Free if

* five years have passed since first contribution and

* there is a qualifying event

(Age 59 1/2, disability or death)

Taxable at time of distribution

Tax Free if

* five years have passed since first contribution and

* there is a qualifying event

(Age 59 1/2, disability, death or first time home purchase)

Rollovers

Can Roll to another Roth 401k or a Roth IRA

Can roll to another traditional 401k or a traditional IRA    

Can Roll to another Roth IRA; cannot roll to a Roth 401k

Loans

Available if plan allows

Available if plan allows

Not Available

Employer

Contributions

If the Employer elects to make contributions

If the Employer elects to make contributions

Does not apply

Asset Protection

Protected from creditors for the full account balance

Protected from creditors for the full account balance

Protected from creditors for only up to $1,000,000

 

 

 

 

Dowload our free  "Roth 401k -a New Contribution Option"booklet to help you decide.   Click on the link and "open" or  "save " the pdf file .

 

                                   Roth Solo 401k FAQs

 

 

Where do I find the Roth Regulations?

 

Roth 401k was introduced in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), under Section 402A of the Internal Revenue Code.

 

What is the difference between a Roth 401k deferral versus a 401k pre-tax deferral? 

 

The deferral contribution is made in after-tax dollars in a Roth 401k. Also, earnings on the Roth deferrals are tax-free if the contributions remain in the plan for at least five years and no withdrawals are taken before attaining age 591/2, death or disability.  

 

A pre-tax 401k deferral is tax deferred and both the deferral and the earnings are taxable when withdrawn.

 

How much can be put in a Roth 401k?  

 

The annual contribution limit applies to both Roth 401k and traditional pre-tax deferrals. In 2014, the maximum deferral amount to either Roth or Pre-tax is $17,500, and those 50 or over may also make catch-up deferrals of up to $5,500.

 

 A 401k plan with Roth deferrals must be designed to permit both the pre-tax deferrals and the Roth deferrals. There can not be just a Roth 401k.

 

When does the participant elect to make a Roth deferral?  

 

The decision to make the deferral as a Roth contribution is made at the time the contribution is made and the decision is irrevocable.

 

Are the Roth contributions required to stay in the plan for five years in order for the earnings to be tax-free?  

 

Yes.

 

For the earnings to be tax-free the Roth contribution must remain in the plan for at least five years and the participant must have attained age 591/2, death, or disability.   

 

Does the five-year period start as of the time of the first Roth contribution, or does each year's Roth contribution have to be in the plan for five years before it is eligible for tax free withdrawal?  

 

The five-year period starts the first day of the plan year of the first Roth contribution. Additional Roth contributions in later years do not start new five-year periods.

 

How are the accounting for the Roth and Pre-tax deferrals handled?  

 

 Roth and Pre-tax deferrals with their respective earnings must be record kept separately.

 

 Are there earning limits on Roth 401k contributions?  

 

 No.

 

Unlike the Roth IRA, where people with adjusted gross income (AGI) exceeding $129,000 as a single filer or $191,000 as a joint filer limits are not eligible to make Roth IRA contributions, every participant in a 401k plan may make Roth 401k contributions regardless of  their income.

 

May an individual have both a Roth IRA and participate in Roth 401k plan?

 

  Yes. (subject to earnings limit for the Roth IRA)

 

May catch-up contributions be made as Roth contributions?  

 

Yes. Up to $5,500 in addition to the $17,500 regular contribution. Only allowed for those age 50 and older

 

May employer matching contributions be made on Roth contributions?  

 

Yes.

 

Roth 401k employer matching contributions are not exempt from taxation upon distribution

 

What  if the Roth funds are withdrawn prior to five years and age 59 1/2?

 

Earnings are taxable and subject to 10% early withdrawal penalty. 

A taxable Roth 401k distribution is taxed in proportion to the participant's contributions and earnings in the account.

 

Let's look at an example to see how this works. A participant with a Roth 401k account with $10,000 in it, $9,600 in contributions and $400 in earnings. If the participant takes a unqualified distribution of $6,000, $5,760 (60% of the contributions) of that distribution will be treated as a non-taxable distribution of contributions, and $240 (60% of the earnings) will be treated as a taxable distribution of earnings.

 

Got Questions? Give us a call Toll Free at 1-866-915-401k or send an email to info@solo-k.com.

 

 

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