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Q.What’s the difference between the Solo 401(k) and Roth Solo 401(k)?
A.Both are individually designed for the self-employed business owner with no employees, other than possibly a spouse. For 2008, both provide for a maximum contribution limit of $46,000 ($51,000 if age 50+). The owner-employee can tax defer up to $15,500 a year as employee contribution and the business can deduct up to 25% of your compensation (net income) up to 46,000 per year ($51,000 if age 50+) as an employer contribution.
The main difference is how the IRS will treat your contributions and distributions. With a traditional Solo 401(k), the IRS defers the taxes on your pre-tax contributions; you receive the tax savings now, the contributions grow tax free and the taxes are paid upon withdrawal. With a Roth Solo 401(k) contribution, the contribution is made with after-tax dollars (the taxes are paid up front), the after-tax dollars contributed grow tax free and are withdrawn tax free.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.
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