The Roth Solo 401k was born in 2006 (along with the Solo 401k). A provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 sought to create a structure that was similar to a Roth IRA for 401k accountholders. This special retirement account has long been a favorite among self-directed investors who want to grow their wealth tax-free. This can be an especially lucrative strategy if you are making an investment you know could skyrocket in value.
For example, the crypto veterans at Nabers Group began investing in bitcoin in early 2013. We expected the investment would pay off so we decided to put some of our money into crypto via our Roth 401k funds. Because Roth 401k funds are “after-tax” dollars, our growth and gains will be tax-free whenever we’re ready to cash out and take our distribution at retirement age.
Roth 401k Included in Your Solo 401k by Nabers Group
We believe in flexibility and giving you the greatest amount of freedom to invest your retirement funds the way you want. Therefore, each Solo 401k by Nabers Group automatically includes a Roth 401k sub-account at no extra charge. This gives you the freedom to decide if and how you want to fund, use and invest with your Roth money.
With a Roth IRA, you aren’t allowed to contribute if you have too high of an income. Roth 401k accounts don’t have an income ceiling which means you can make Roth contributions and capture tax-free growth from your Roth 401k funds, even if you are a high earner.
In-Plan Roth Conversions
The IRS released an amendment in 2010 allowing in-plan Roth conversions. Of course our documents are always up to date and include IRS-approval, so we were one of the first document providers to offer the in-plan conversion in our Solo 401k right after the amendment was released by the IRS.
The Solo 401k by Nabers Group allows you to convert a portion or even all of your Solo 401k funds to Roth. Our expert team will share best practices, articles and guides with you so you have the tools to work with your CPA or tax preparer to calculate and pay the taxes on your conversion. The converted funds may remain in your same Solo 401k with Nabers Group with no paperwork, and Nabers Group will never charge you any fees on in-plan conversions.
Bookkeeping Best Practices
Many CPAs will recommend keeping separate bank and/or brokerage accounts for your pre-tax and after-tax funds. This makes bookkeeping much simpler and cleaner. It’s a good idea to maintain separate depository (bank and/or brokerage) accounts for each tax class so you can easily calculate required minimum distributions and also know which funds you are able to remove tax-free at retirement age.
Most tax professionals will also recommend you not mix Roth and pre-tax funds in a single investment. The reason is that any further money needed for the investment (repairs on a rental property for example) must come equally from each tax class.
Let’s take a look at an example:
Mary has $500,000 in her Solo 401k. $120,000 is Roth funds and the remaining $380,000 is pre-tax traditional 401k funds.
Mary decides to purchase a property for $200,000 putting in 50% Roth funds and 50% pre-tax funds.
Mary must always keep those capital contributions the same, meaning she only has $20,000 remaining in her Roth funds to invest and/or have on reserve for expenses related to the property.
Keep things simple and limit each investment to one tax class (pre-tax or Roth) for easiest bookkeeping!
The Solo 401k by Nabers Group allows you to take the maximum employee salary deferral contribution amount as a Roth contribution. This allows you to maximize your Roth contributions each year, but the amount you contribute is your choice. You can elect to contribute the entire amount of simply a portion of your employee salary-deferral contributions as Roth funds. Our team will provide access to contribution calculators and contribution forms so you can calculate the amount to contribute that’s right for you.
Required Minimum Distributions
Unlike the Roth IRA, the Roth Solo 401k does have required minimum distributions beginning at age 70.5. There are no taxes due on these distributions, but you will begin to withdraw funds once you reach the RMD age. If you’re not ready to yet distribute the assets, consider what some Solo 401k accountholders have done and open a Roth IRA. If you are over age 59.5 and your Roth 401k funds have been in your account for over 5 years, you can begin to roll the funds out to a Roth IRA. The Roth IRA does not have required minimum distributions, which gives you the freedom to keep your funds in a tax-free entity while deciding your own distribution schedule.