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Roth 401(k)s and Solo 401(k)s: The Next Frontier in Retirement Investing

A few decades have passed since President Clinton signed the Taxpayer Relief Act of 1997 into law. The new law provided for a range of new tax benefits for consumers, including today’s popular Roth IRA plans.

Roth accounts have become a key tool for investors that seek to reduce their total lifetime tax liabilities, in part because they don’t need to be cashed in (and trigger large tax bills) during your retirement years, unlike a traditional IRA. You can read more about that here. In addition, tax-free Roth withdrawals don’t raise reported income. So they can help savers stay in a lower tax bracket in retirement, which is handy if you’re trying to avoid the “tax torpedo.”

Yet few investors take advantage of another kind of Roth account, the Roth 401(k). Unlike any kind of IRA, which has strict limits on how much can be invested in them year ($6,000 per year, or $7,000 if you are over 50), Roth 401(k)s allow for much higher contributions. We’re talking about up to $19,000 you can set aside each year in an account that will grow and grow and never have a tax bill. For those over 50, a hefty $25,000 can be put into the account per year. And your employer may choose to add yet more money into the fund for you.

Ah yes, the employer contribution. We’re talking about 401(k) plans, which are generally run by employers. If you are trying to aggressively build a nest egg for retirement, consider having both a regular 401(k) and a Roth 401(k) at work.

Going Solo

There’s yet another kind of 401(k) that doesn’t involve employers. Self-employed people such as freelancers and small business owners can have their own 401(k), which goes under the handy name Solo 401(k).

Here again, we’re talking about annual contributions that far surpass the limits you’ll hit when funding an IRA or SEP-IRA. Few people are aware of solo 401(ks). That’s because many financial-services firms were to slow to roll out such plans. Nowadays, Fidelity, Vanguard and others can help you establish a solo 401(k) for a very low fee. These accounts permit almost limitless investing options and can come in regular and Roth flavors.

Remember, with any of these accounts, you can only contribute up to the amount you earned that year. So retirees are better off funding such accounts, before they see a sharp drop in earned income.

These plans offer great long-term tax benefits, and yet remain as well-kept secrets.