The Ultimate Tool

The Ultimate Tool

           For everyone who is self-employed, particularly those of you who have high incomes and are disqualified from having a Roth IRA, the introduction of the Roth 401(k) was an absolute godsend. The Roth 401(k) has all the benefits and characteristics of a Roth IRA as well as all the benefits and characteristics of a 401(k). It requires employees to discipline themselves by deferring a significant portion of their pay into the 401(k).

            How much you can put into a 401(k) depends upon your age, your earnings, and how much you desire to go into the Roth portion versus the traditional portion of the 401(k). If you contributed the maximum amount, you could put approximately $18,000 a year into the Roth portion of a 401(k). Since 401(k)s are governed under the ERISA Law, they are often seen as an excellent asset protection tool. They have all of the Roth characteristics of taxable money growing tax-free and being withdrawn tax-free at age 59½ if the account holder has held the account for five years or more.

            In many ways, the Roth 401(k) is a super-sized and better version of a Roth IRA. If you want to learn more about Roth 401(k)s, I highly recommend you read IRS Publication 590 which is available at

            There are four questions I need to ask you:

1. Are you self-employed?

2. Are you your only employee?

3. If yes, have you set up a solo Roth 401(k)?

4. If yes, are you consistently contributing to it by deferring a portion of your monthly income into that account?

            For those of you who answered yes to all four questions, congratulations! For those of you who answered yes to the first two questions and no to the remainder of the questions, what’s your excuse, and what are you waiting for?