Solo Roth 401k vs Solo Traditional 401k

Self-employed people now have many different options when it comes to funding their retirement. You could choose a solo 401k, solo Roth 401k, or an IRA. Each form of investment comes with it some benefits and drawbacks. There is no right answer for everyone when it comes to retirement. However, by looking at a few different factors, you can choose a plan that fits your situation and circumstances. Here are a few things to consider when dealing with a solo 401k or solo Roth 401k.

Solo 401k

A solo 401k presents you with most of the same options of a traditional 401k plan. The main aspect that you have to consider with a solo 401k is the tax-deferred savings. When you make your income, you can elect to contribute a certain percentage of the money to the account without paying taxes on it. The amount that you contribute, lowers your taxable income for the year. Therefore, the money goes into the account and grows without you paying a cent in taxes. This allows you to build up your account faster without having to take out a chunk for the government.

However, with this idea also comes the drawback of when you start to withdraw the money. When you take out the money, you are taxed on the money at the regular income tax rate. Therefore, if you are in a higher tax bracket when you retire, as most people are, you will pay taxes at that rate on the money that you withdraw.

Solo Roth 401k

With a Roth 401k, the opposite happens with the tax process. You make your income and are taxed on the full amount. Then with your money, you elect a certain amount of money into the Roth 401k. The money can then grow in the account tax free, just like with the regular 401k. However, the big difference comes when you retire. At age 59 1/2, you can start to withdraw the money. However, this time, you are not taxed on the money. Regardless of how much money you saved back and how much you earned, you do not have to pay a cent in taxes. This means that you could live the rest of your life without paying income taxes.

The big advantage of this type of account is that it takes advantage of the tax bracket discrepancy. When you are young, you will most likely be in a lower tax bracket than when you get older. You can pay taxes then when the rate is lower, instead of later when the rate is higher. This doesn't even take into consideration if the government raises the tax rate over the next 40 or 50 years.


Each type of account can be beneficial to different people. If you value building the account quicker, a traditional 401k may be to your advantage. However, if you are concerned about paying taxes in the future, a Roth 401k is for you. If you can make yourself take the early hit on taxes, a Roth 401k is the way to go.

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