Can I contribute to both Roth IRA and Mega Backdoor Roth Solo 401K?

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The solo 401k plan, commonly referred to as self-directed Solo 41k is the retirement plan of choice for self-employed individuals or owner-only businesses including for the features highlighted below:

-The highest contribution limits for any defined contribution plan including up to $57,000 (or even $63,500 if you are 50 or older) for 2020 (for 2021: $58k or $64.5 if you are 50 or older).

-The ability to make pre-tax, Roth, and even Mega Backdoor Roth contributions.

-401k participant loans of up to $50,000

-Invest with checkbook control in real estate, cryptocurrencies, notes, private placements, and other types of alternative investments.

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As a self-employed individual, contributing to a retirement account is crucial. It not only helps secure your future financial stability, but also offers tax benefits in the present. However, deciding which retirement accounts to contribute to can be overwhelming. One common question that arises is whether one can contribute to both a Roth IRA and Mega Backdoor Roth Solo 401K.

The short answer is yes, one can contribute to both accounts simultaneously. However, there are some limitations and rules to consider before doing so.

Firstly, let us understand the difference between these two accounts. A Roth IRA is a retirement account that is funded with post-tax dollars. This means that the contributions made to this account are not tax-deductible, but the earnings and withdrawals from the account are tax-free. On the other hand, a Mega Backdoor Roth Solo 401K is a type of 401k plan that allows for larger contributions than a traditional 401K, up to $58,000 per year. This includes both the employee and employer contributions. The Mega Backdoor Roth Solo 401K also allows for after-tax contributions that can be converted to a Roth account, providing tax-free growth.

Now, let’s look at the rules and limitations involved in contributing to both accounts. In order to contribute to a Roth IRA, an individual must have earned income below a certain threshold. For 2021, the maximum contribution limit for a Roth IRA is $6,000 for those under the age of 50, and $7,000 for those 50 and over. Additionally, the individual must not be over the income limit for single or joint filers. If the individual earns too much to contribute to a Roth IRA, they can still contribute to a Traditional IRA with no income limit, but the contribution may not be tax-deductible.

For the Mega Backdoor Roth Solo 401K, an individual must have an eligible plan that allows after-tax contributions. Not all Solo 401K plans allow this, so it is important to check with the plan provider. If the plan does allow for after-tax contributions, the individual can contribute up to $58,000 per year, but this includes all contributions made to the account, including employee and employer contributions.

Another important factor to consider when contributing to both accounts is the annual contribution limit. The total combined contribution to both accounts cannot exceed the annual limit set by the IRS. For 2021, the total contribution limit is $58,000 for those under the age of 50, and $64,500 for those 50 and over. This means that if an individual contributes the maximum allowed to their Mega Backdoor Roth Solo 401K, they may not be able to contribute the full amount to their Roth IRA.

In summary, it is possible to contribute to both a Roth IRA and Mega Backdoor Roth Solo 401K, but there are rules and limitations to consider. It is important to check with your plan providers to ensure eligibility and the specific contribution limits for each account. By carefully planning and maximizing contributions to both accounts, self-employed individuals can secure their financial future while enjoying tax benefits in the present.