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5 Strategies for Increasing Tax-Free Money in Retirement Using a Self-Directed Solo 401(k)

Updated: Apr 23, 2021

The Daily CPA recently published my article: 5 Strategies for Increasing Tax-Free Money in Retirement Using a Self-Directed Solo 401(k). The full article can be found by clicking on the preceding link, but the excerpt containing the five main strategies can be found here:

Excerpt: 5 Strategies for increasing Roth funds

1. Salary deferral only.

The person can choose to contribute their salary deferral portion directly to the designated Roth account and then put the profit-sharing contribution into the pre-tax account. This might be a good compromise to enjoy some tax deferral benefits now while still creating a pool of tax-free money available in retirement.

2. Salary deferral and profit-sharing.

For people who are not particularly concerned about tax-savings through deferral today and want to increase their tax-free money in retirement as much as possible, they could make Roth salary deferral contributions along with the pre-tax profit-sharing contributions.

They would then convert the profit-sharing contribution to the Roth account and pay the tax on it. The person can then invest all of the funds through their Roth account so that the basis, income, and gain will all be tax-free upon withdrawal.

3. Pre-tax salary deferral and profit-sharing, plus voluntary after-tax.

Contributing after-tax dollars is also a way to maximize, and reach, the contribution limit amount of $57,000 or $63,500 since it can be made in addition to the salary deferral and profit-sharing contributions.

For example, if the person can only contribute $35,000 pre-tax, instead of the full $57,000 amount allowed (assuming they are less than 50 years old) due to income restrictions, they can add $22,000 of voluntary after-tax dollars to reach the limit, and then convert the after-tax money to the Roth account.

This, again, might be a compromise to have both tax deferral today and tax-free money later.

4. Voluntary after-tax only

If the person wants to fully maximize the amount of tax-free money available in retirement, they can contribute the full annual limit (assuming they have the income level to cover it) as a voluntary after-tax contribution and then convert it to the Roth account.

5. In-plan Roth conversion (if the plan is