Roth Solo 401(k) vs. Solo 401(k): What’s the Difference?

A Solo 401(k) is a retirement plan for self-employed individuals and small business owners with no employees other than a spouse. A common point of confusion is the “Roth Solo 401(k)” versus a “Solo 401(k).” This is not a choice between two different plans, but rather the tax treatment of employee contributions made within the same Solo 401(k) structure. A single plan allows the owner to make employee contributions as traditional (pre-tax), Roth (after-tax), or a combination of both. Understanding these contribution types is important for leveraging the plan effectively for retirement savings.

Fundamental Contribution and Tax Differences

The primary distinction between contribution types lies in their tax treatment. When you make traditional, pre-tax contributions as the “employee,” you use dollars that have not yet been subject to income tax for the current year. This reduces your adjusted gross income (AGI) for the year, resulting in an immediate tax saving. These funds then grow tax-deferred, and you do not pay taxes on investment earnings each year. In retirement, any money you withdraw from this traditional balance is taxed as ordinary income.

Conversely, Roth contributions are made on an after-tax basis. This means you contribute money that has already been included in your taxable income for the year, so you receive no upfront tax deduction. The primary advantage is that your contributions and all their subsequent investment earnings grow completely tax-free. As long as you meet the qualifications, withdrawals in retirement are not subject to federal income tax, providing a valuable stream of tax-free income.

The choice between traditional and Roth only applies to your contributions as the “employee” of your business. As the “employer,” you can also make profit-sharing contributions to the plan on your own behalf. These employer contributions are always made on a pre-tax basis, regardless of your employee contribution choice. This means that even if you make all of your employee contributions to the Roth account, any employer profit-sharing funds will be deposited into a separate, traditional pre-tax sub-account within your Solo 401(k).

Contribution Limits and Calculations

A Solo 401(k) allows for savings by combining an employee salary deferral and an employer profit-sharing contribution. For 2025, you, as the “employee,” can contribute up to $23,500. If you are age 50 or over, you can add a catch-up contribution of $7,500. A special rule for 2025 allows those aged 60 to 63 to make a higher catch-up contribution of $11,250. For individuals 64 and older, the catch-up amount reverts to the standard $7,500.

On top of the employee contribution, you, as the “employer,” can contribute up to 25% of your self-employment compensation. The total combined contributions from both the employee and employer cannot exceed a set limit, which for 2025 is $70,000. This employer portion does not count toward your employee deferral limit.

To illustrate, consider a 45-year-old sole proprietor with a net self-employment income of $150,000. Their maximum employee contribution for 2025 is $23,500, which they can designate entirely to the Roth portion of their plan. For the employer contribution, the calculation is based on net adjusted business profits, which is gross income minus one-half of the self-employment tax. Assuming this calculation results in a compensation base of $139,525, they could make an employer profit-sharing contribution of up to 25% of that amount, or $34,881. Their total contribution for the year would be $58,381 ($23,500 Roth employee + $34,881 traditional employer).

Rules for Withdrawals and Distributions

The tax treatment of withdrawals from a Solo 401(k) depends on whether the funds are from the traditional or Roth balance. Money taken from the traditional, pre-tax portion of the account is fully taxable as ordinary income in the year of the distribution. This includes your pre-tax employee contributions, all employer profit-sharing contributions, and all associated investment earnings. In contrast, qualified distributions from the Roth balance are tax-free. A distribution is considered “qualified” if it is made after you have reached age 59½ and have held the Roth account for at least five years.

A difference emerges when considering Required Minimum Distributions (RMDs). The IRS mandates that you begin taking annual withdrawals from most retirement accounts starting at a certain age. For the traditional portion of your Solo 401(k), you must begin taking RMDs. However, the Roth portion of a Solo 401(k) is not subject to RMDs for the original account owner. This allows the funds in the Roth account to continue growing tax-free for your entire lifetime if you do not need them for income.

There are also rules for early withdrawals. If you take a distribution from either the traditional or Roth portion of your plan before reaching age 59½, the withdrawal is considered non-qualified. For the traditional portion, the entire amount is subject to ordinary income tax plus a 10% penalty. For the Roth portion, only the earnings component of the withdrawal is subject to income tax and the 10% penalty; your original contributions can be withdrawn without this penalty.

Key Factors in Making Your Choice

Deciding between Roth and traditional contributions hinges on an analysis of your current financial situation versus your expectations for the future. The decision involves comparing your current income tax bracket against your anticipated tax bracket in retirement. If you expect to be in a higher tax bracket during your retirement years, paying taxes now through Roth contributions can be more advantageous. If you believe your income and tax rate will be lower in retirement, deferring the tax liability with traditional contributions is the better strategy.

Your immediate business income and cash flow needs can also influence this choice. For a self-employed individual with high earnings, the upfront tax deduction provided by traditional contributions can be valuable. Reducing your current taxable income can lower your annual tax bill, freeing up capital that can be reinvested into your business or used for other financial goals.

Another consideration is the concept of tax diversification in retirement. By contributing to both traditional (pre-tax) and Roth (after-tax) accounts over your career, you create flexibility for managing your tax liability in retirement. Having access to both tax-deferred and tax-free sources of income allows you to strategically withdraw funds from different accounts to control your taxable income each year.

A feature of the Solo 401(k) is that, unlike a Roth IRA, there are no income limitations that restrict your ability to make Roth contributions. High-income business owners who are phased out of contributing to a Roth IRA can still make full Roth contributions to their Solo 401(k) as an employee. This provides an opportunity for high earners to build a substantial source of tax-free retirement income.

Finally, the choice has implications for estate planning. A Roth account balance can be a more tax-efficient asset to leave to your beneficiaries. Heirs who inherit a Roth Solo 401(k) can receive the distributions tax-free. In contrast, inheriting a traditional, pre-tax 401(k) balance means the beneficiaries will have to pay ordinary income tax on any funds they withdraw.