One of the cool perks of a solo 401(k) plan is the option to put away money using "designated Roth contributions." What's the difference between a regular 401(k) contribution and a Roth contribution? It has to do with when the money is taxed, before you put it into savings or after you take it out.
With a conventional 401(k) plan, all contributions are "pretax." Basically, the money you invest in your 401(k) is deducted from your taxable income for the year. The flip side is that you will have to pay income tax on all of the money you withdraw from your 401(k) after you retire. A conventional 401(k) is a smart option if you expect to be in a lower tax bracket when you retire.
Roth contributions work in the opposite way. You pay income tax on the money before you put it into the retirement savings account, but you withdraw the money tax-free. In this way, Roth contributions are a good choice for people who expect to be in a higher tax bracket when they retire.
The interesting thing about a solo 401(k) is that you can have it both ways. Once you elect to make Roth contributions, you can make both Roth and conventional contributions to the same 401(k) account in the same year as long as the total does not exceed your contribution limit [source: IRS]. It's a level of flexibility that's not available in either the SEP IRA or SIMPLE IRA.
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