Paying tax upfront on your retirement savings using the Roth 401 k plan sub account feature can save you from paying higher tax in the future
Saving your retirement fund or a portion of it in a Roth 401 k plan is not as complicated as you think. Once you understand its long-term benefits, paying taxes upfront in your contributions would become a better choice for you rather going for the contribution tax break.
Considering the past tax patterns, you may have to pay higher federal taxes in future or who knows how it’s going to be. Since the Solo 401k contributions are done before tax, any future tax increase will automatically affect your pre-tax retirement funds when you make withdrawals during retirement. In order to avoid higher taxes in future, it is best to make after-tax contributions today, especially because you’re already aware of the current tax rates.
Through the inbuilt Roth Solo 401k sub-account feature, you can easily make after-tax contributions to your retirement plan. If you are contributing to a self-employed retirement plan, putting funds in the Roth account would be a breeze. Through this feature, you can even make contributions to both pre-tax and post-tax accounts, which will make your retirement saving tax diversified. This will give you a stretch in your savings, especially if you will fall under the higher bracket category during retirement age.
Once you choose to make after-tax contributions using the Roth 401 k plan, that contribution becomes irrevocable, as you cannot reclaim the tax that has been deducted from your contribution and put it in a pre-tax account. But it’s not a big deal because you know that once you withdraw that amount or receive the distribution from the taxed contribution, no more taxes or penalty will be charged from you. You can, at any time, transfer funds from your pre-tax account to your solo Roth 401k and convert it to a post-tax contribution. It’s up to you whether you want to avoid taxes today and pay higher tax in the future, or pay your taxes today and receive higher distributions in future.