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Self Employed Roth 401k

Participants in a Self Employed 401k can elect to make Roth 401k contributions only with the salary deferral portion of the Self Employed 401k. In 2015 the Roth 401k salary deferral contribution limit is $18,000 ($24,000 if age 50 or older). Roth 401k salary deferral contributions are not tax deductible, but withdrawals are tax free after age 59 ½ provided the 5 year rule is satisfied.

Note: The profit sharing portion of the Self Employed 401k contribution is not eligible to be made as a Roth contribution. Profit sharing contributions are made pre-tax and are tax deductible.

The basic difference between a Self Employed Roth 401k and a Traditional Self Employed 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.

Below are some facts and rules about the Self Employed Roth 401k.

  • The 2015 Self Employed Roth 401k contribution limit is $18,000 or $24,000 if age 50 or older.
  • Roth 401k contributions are made after-tax and are not tax deductible.
  • Roth 401k distributions are received tax free from federal income taxes provided there is both a 5 year holding period AND there is a qualifying event. The 5 year holding period begins with the first contribution to a Roth 401k account and there are 3 qualifying events: the attainment of age 59 ½, disability or death.

Self Employed Roth 401k rules

  • After-tax contributions cannot be combined with pre-tax contributions. As a result, within your Self Employed 401k there will be two separate accounts; one account will be designated for after-tax Roth contributions, the other for pre-tax contributions such as the profit sharing portion of your Self Employed 401k. You will need to segregate tax deductible versus non tax deductible (Roth) account activity when reporting to the IRS.
  • Roth 401k accounts from a previous employer can be rolled over to a Self Employed Roth 401k. If rolled over to a Self Employed 401k, the 5-year holding period begins with the earlier of the date the rolled over account was established, or the date the receiving Roth account was established.
  • Self Employed Roth 401k accounts can be rolled over to a Roth IRA or to another identically designated Self Employed Roth 401k. Otherwise the previously untaxed earnings will be treated as an early distribution from a qualified plan (liable for taxes and penalties for any such early distribution) unless you have had this Roth account established for more than five years.

Learn more the Self Employed Roth 401k


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*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.