What is a Roth Solo 401(k) Plan?

Retirement investment accounts such as IRAs and 401(k)s are subject to regulations dictated by the Internal Revenue Service (IRS). No surprise there, right?

Because of this, the various types of retirement accounts have very specific investment and distribution guidelines, which they must abide by or owners will be faced with penalties, fines and taxes. Retirement accounts are typically taxed in one of two ways: pre-tax deductions or post-tax wages. A self-directed 401(k), also known as a solo 401(k), provides plan owners with an almost tax-free investment opportunity and some of the most diverse portfolio options. And when you opt for a Roth solo 401(k), the possibilities are endless!

Limitless Investment Potential With A Roth Solo 401(k)

Many types of retirement accounts limit your investments to mutual funds, stocks and bonds. This is not so with a Roth solo 401(k) plan. In fact, with your Roth solo 401(k) plan you can invest in things like:

  • Real Estate
  • Tax Liens
  • Precious Metals
  • Currencies
  • Private Investments

Funding Your Roth Solo 401(k)

You can fund your Roth solo 401(k) account in two different ways.

  1. When you make contributions to your Roth solo 401(k) account, you can deposit your funds into your account. Simply write “Roth” in the memo line of your contribution check before depositing it into your account. These contributions are made after taxes have already been deducted from your paycheck. This makes your investment returns and earnings tax-free and entirely yours.
  2. If you have traditional funds already in your Solo 401(k), they can be converted into Roth contributions. The IRS does not consider this to be a distribution. Instead, this is considered to be an “in plan” conversion.

As your plan provider, Royal Legal Solutions can help you figure out the best way to fund your Roth solo 401(k) account. Whether you want to deposit Roth contributions directly into your account or opt for an “in plan” conversion, we are here to make the process easy for you.

Self-Directed IRAs vs Roth Solo 401(k)s

As stated above, your Roth solo 401(k) allows you to invest in real estate. You may already know that a self-directed IRA (SDIRA) permits this as well. Both a Roth solo 401(k) and SDIRA permit you to borrow money for investment purposes. However, the IRS subjects a portion of the profits generated by these investment loans to an Unrelated Business Income Tax (UBIT). (This is typically around 35% of your profits.) While a UBIT is owed on loan profits of a SDIRA, the Roth solo 401(k) earnings are exempt.

Last Updated: 
April 1, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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