Should Self-Employed Investors Have a Solo 401(k) and a Roth IRA?

Self-directed investing enables you to build the portfolio of your choosing with assets you believe in. Often investors hold more than one retirement account, and a combination of a Solo 401(k) and a Roth IRA might be particularly well suited to individual business owners. 

Want to open a new self-directed account to supplement your existing strategy? Click here to open a new account in a matter of minutes! 

Options for Self-Employed Investors 

The IRS provides additional investment vehicles to self-employed individuals to make higher retirement contributions compared to regular wage earners. One such account is the Solo 401(k), only available to self-employed taxpayers with no employees.  

Another option is the Roth IRA. This account allows the account holder to take tax-free distributions five years after making his or her first contribution and upon reaching age 59 ½. Eligibility to hold and contribute to a Roth IRA is far less stringent than that of a Solo 401(k); anyone with earned, reportable income can make Roth contributions subject to income limitations. However, Solo 401(k) account holders may contribute nearly ten times as much per year as Roth IRA account holders. 

Can self-employed investors take advantage of the higher contribution limits of Solo 401(k)s while enjoying the tax-free distributions of Roth IRAs? They certainly can, and they can do so by holding and managing both accounts. 

Contribute, Then Convert 

To achieve the best of both worlds, you could: 

  • Make the maximum allowable contribution to a Solo 401(k) 
  • Transfer the contribution to your other account via Roth conversion 

With a Roth conversion, you can bring your holdings from a pre-tax status, such as a Traditional IRA and typical of a Solo 401(k), to a post-tax status of a Roth IRA.  

Conversions require payment of income taxes on the converted balance, as Roth contributions are after-tax deposits. The reward for paying taxes on deposits is tax-free distributions on both contributions and account growth.  

By combining Solo 401(k) contributions with Roth conversions, you will have essentially made a Roth contribution that’s nearly ten times the annual limit. This requires two steps, but once situated in your Roth, the converted balance can be invested and the account can grow at your direction. You’ll also have tax-free distributions down the road. 

Know Your Options 

Self-directed investing gives you the power to orchestrate the approach that will satisfy your financial needs. New Direction Trust Company can help make your desired strategy a reality! 

Click here to download our Solo 401(k) Investing Guide, give us a call at 877-742-1270, or send us a message through the Client Portal if you have questions we can assist you with. 

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