Last Updated 07/01/2022
A Roth Solo 401k is not a Roth IRA
First, a Roth solo 401k (a.k.a. designated Roth 401k) is not the same as a Roth IRA. This is a common point of confusion. Even though Roth contributions both to the Roth solo 401k and the Roth IRA go in on after-tax basis and the gains grow tax free, they are both different.
One other big difference between Roth IRA contributions and Roth solo 401k contributions is that Roth solo 401k contributions are not subject to the income limitation in order to make them, whereas if you make too much earned income you can’t make Roth IRA contributions. If you want to learn more about the differences, VISIT HERE, but the rest of this blog will concentrate on how to make contributions to the roth solo 401k.
How to Make Annual Roth Solo 401k Contributions
First, make sure that you open a separate holding account (bank or brokerage) to hold the Roth solo 401k funds as they cannot be commingled with your other solo 401k funds (e.g., the pretax solo 401k funds). The IRS is very clear on this separate account tracking rule.
If the solo 401k has multiple participants (e.g., both spouses or business owners participate in the solo 401k plan) and they each want to make Roth solo 401k contributions, a separate holding account is required for each participant. CLICK HERE for examples.
The maximum Roth solo 401k contribution for 2021, which applies on per participant basis, is $19,500 (plus an additional $6,500 for participants age 50 or over). The Roth solo 401k contribution limit increased to $20,500 for 2022 and the catch-up contribution remains at $6,500.
The logistic of making the contributions to the respective Roth solo 401k bank accounts entail making the check payable in the name of the solo 401k plan, listing the bank or brokerage account number for the Roth solo 401k in the memo section of the check and depositing the check at the local bank or brokerage firm branch. The check may also be mailed to the bank or the brokerage firm. Finally, some banks and brokerage firms will also accept the Roth solo 401k contributions electronically via ACH (automatic clearing house)–one such firm is Fidelity Investments.
Additional Roth Solo 401k Tidbits
- A Roth solo 401ks is considered part of the solo 401k plan but is a separate holding account in the solo 401k plan that holds designated Roth contributions.
- Roth solo 401k contributions are elective employee contributions NOT profit sharing contributions and are included in gross income since Roth contributions are not tax deductible.