There’s no one right way to save for retirement. There are many possible strategies to help maximize your efforts. One way to save more each year is to contribute to a Roth IRA in addition to an employer’s 401(k) plan. Not only is having both a Roth IRA and a 401(k) allowed by the IRS, but having both could also help you build a bigger nest egg. What if you make too much for a Roth? You can still use these two powerful ways to save at the same time.
The Double-Retirement Strategy You Might Be Missing
Hey there, fellow retirement planners! I’ve been deep-diving into the world of retirement accounts lately, and lemme tell ya – there’s some seriously good news if you’re self-employed or have a side hustle. Yes, you can absolutely have both a Roth IRA and a Solo 401(k) at the same time! This powerful combo could be your ticket to a much more comfortable retirement.
As a self-employed person myself, I was thrilled when I discovered this little-known strategy. The ability to contribute to both accounts gives us entrepreneurs and freelancers a massive advantage when planning for our golden years.
Why You Should Consider This Power Combo
Before we dive into the nitty-gritty. let’s get straight to the point having both a Roth IRA and a Solo 401(k) can significantly boost your retirement savings because
- You get separate contribution limits for each account
- You can diversify your tax advantages (tax-free growth vs. tax deductions now)
- You gain more control and flexibility over your retirement planning
- You can potentially save WAY more per year than with just one account
Now, let’s break down how these accounts work together and why this combo is such a smart move.
Understanding the Basics: Roth IRA vs. Solo 401(k)
Before we go further let’s quickly review what these accounts actually are
Roth IRA:
- Funded with after-tax dollars
- Grows tax-free
- Tax-free withdrawals in retirement (if you follow the rules)
- 2024 contribution limit: $7,000 ($8,000 if you’re 50+)
- 2025 contribution limit: $7,000 ($8,000 if you’re 50+)
- Income limits apply for eligibility
Solo 401(k) (also called Individual 401(k)):
- For self-employed individuals with no employees (except spouse)
- Can make both employer and employee contributions
- 2024 contribution limit: Up to $23,000 as employee + up to 25% of compensation as employer, with total combined limit of $69,000 ($76,500 if 50+)
- 2025 contribution limit: Up to $23,500 as employee + up to 25% of compensation as employer
- No income limits for participation
The Beautiful Truth: Separate Contribution Limits
Here’s where things get exciting. The contribution limits for each account are completely separate from each other. This means contributing to one doesn’t reduce how much you can put in the other!
This is very different from having multiple IRAs, where the total amount of money you can put into all of them together can’t go over the annual limit.
Let’s look at a real-world example:
Example: Sarah, a 45-year-old freelance graphic designer, makes $100,000 in net self-employment income.
- She can contribute $7,000 to her Roth IRA (2024 limit)
- As “employee” of her Solo 401(k), she can contribute up to $23,000
- As “employer,” she can contribute roughly 20% of her net income after deducting self-employment taxes (approximately $18,587)
- Total retirement savings potential: $48,587 for 2024!
That’s nearly half her income going into tax-advantaged retirement accounts! Try doing that with just a single account type.
Roth Solo 401(k): Another Option to Consider
It’s worth mentioning that Solo 401(k) plans can often include a Roth component, similar to how many employer 401(k) plans now offer a Roth option. This means you actually have three potential combinations:
- Traditional Solo 401(k) + Roth IRA
- Roth Solo 401(k) + Roth IRA
- Split your Solo 401(k) between traditional and Roth + Roth IRA
Because of this, you can really make your tax plan fit your current situation and your plans for the future.
Income Limits: The Potential Roadblock
While there are no income limits for Solo 401(k) participation, Roth IRAs do have income eligibility thresholds. For 2024:
- Single filers: Phase-out starts at $146,000 and you’re ineligible at $161,000
- Married filing jointly: Phase-out starts at $230,000 and you’re ineligible at $240,000
For 2025, these limits increase slightly:
- Single filers: Phase-out starts at $150,000 and you’re ineligible at $165,000
- Married filing jointly: Phase-out starts at $236,000 and you’re ineligible at $246,000
If your income is too high, don’t worry! You might still be able to use the “backdoor Roth” strategy by contributing to a traditional IRA and then converting it to a Roth IRA.
Setting Up Your Accounts: Practical Steps
If you’re convinced that the Roth IRA + Solo 401(k) combo is right for you, here’s how to get started:
Step 1: Confirm Your Eligibility
- Verify you have self-employment income (even from a side gig)
- Check that you meet Roth IRA income requirements
- Ensure you have no full-time employees (besides a spouse)
Step 2: Open Your Accounts
- For Solo 401(k): Choose a provider (Fidelity, Vanguard, etc.) and complete their application
- For Roth IRA: Open an account with any major brokerage
Step 3: Create a Contribution Strategy
- Decide how much to contribute to each account
- Determine if you’ll make employee and employer contributions to your Solo 401(k)
- Set up automatic contributions if possible
Step 4: Choose Your Investments
- Select investments within each account based on your risk tolerance
- Consider diversifying across both accounts
Tax Planning Considerations
The tax benefits of having both accounts are one of the best things about having them. Here’s how to think about it:
Current Tax Situation:
- In high tax bracket now? Consider traditional (pre-tax) Solo 401(k) contributions to reduce current taxes
- In lower tax bracket? Consider Roth options for both accounts
Future Tax Expectations:
- Expect higher tax rates in retirement? Prioritize Roth contributions
- Expect lower tax rates in retirement? Mix of traditional and Roth might be ideal
Remember, having both pre-tax and Roth accounts gives you flexibility to manage your taxable income in retirement!
Practical Tips for Maximizing This Strategy
Based on my own experience and research, here are some practical tips:
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Employer matches should come first. If you have a day job with a 401(k) match and also make money as a freelancer, you should always get the full match before putting money into any other accounts.
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Consider front-loading – If your cash flow allows, consider making your Roth IRA contribution early in the year to maximize tax-free growth
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Be careful with deadlines – Roth IRA contributions can be made until tax day of the following year, but Solo 401(k) employee contributions generally must be made by December 31
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Keep good records – With multiple accounts, tracking your contributions becomes more important
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Consult a tax pro – The interaction between these accounts can get complex, especially when calculating your maximum Solo 401(k) contribution
Real-Life Example: How I Use Both Accounts
I personally use both these accounts for my retirement planning. Here’s my approach:
I have a content creation business that generates about $120,000 in net income annually. I max out my Roth IRA first ($7,000 for 2024), then make both employee and employer contributions to my Solo 401(k).
For my Solo 401(k), I split my contributions between traditional (to lower my current tax bill) and Roth (for tax-free growth). This gives me tax diversity and more options in retirement.
Last year, I was able to shelter nearly $45,000 from either current or future taxation – that’s money that’s either reducing my taxes now or growing completely tax-free for later!
Common Questions About Having Both Accounts
Q: Will contributing to both accounts create any tax complications?
A: Not really! The IRS treats them as separate accounts with separate limits. Just keep good records.
Q: Can I roll my Solo 401(k) into my Roth IRA later?
A: Yes, but a rollover from a traditional Solo 401(k) to a Roth IRA would be a taxable event. Roth 401(k) funds can roll into a Roth IRA tax-free.
Q: What if my income varies year to year?
A: That’s actually where this strategy shines! In high-income years, you can max out both accounts. In lower-income years, you might focus just on the Roth IRA.
Q: Do I need to file any special paperwork with the IRS?
A: Solo 401(k) plans need to file Form 5500-EZ once plan assets exceed $250,000. No special forms needed just for having both accounts.
Q: Can my spouse also do this strategy?
A: Absolutely! If your spouse is also involved in your business, they can have their own Solo 401(k) and Roth IRA too.
The Bottom Line: Double Your Retirement Potential
Having both a Roth IRA and a Solo 401(k) is completely allowed and is one of the most powerful retirement saving strategies available to self-employed individuals and small business owners. The separate contribution limits let you save significantly more than you could with either account alone.
This combo gives you:
- Higher total contribution limits
- Tax diversification benefits
- More investment options
- Greater flexibility in retirement
For self-employed folks like us, retirement planning falls entirely on our shoulders – no corporate pension or HR department to help out. Taking advantage of every available tool is just smart planning, and the Roth IRA + Solo 401(k) combo is one of the best tools in our toolkit.
Have you started using this powerful combo yet? If not, what’s holding you back? Remember, the sooner you start, the more time your money has to grow. And with the tax advantages of these accounts, that growth can be pretty impressive over time!
Final Thoughts
Remember that retirement planning is personal, and what works for one person might not be right for another. Consider consulting with a financial advisor who specializes in working with self-employed professionals to create a customized strategy for your situation.
Now go forth and save for that awesome retirement you deserve!
Benefits of having a Roth IRA and a 401(k)
From increasing your annual retirement savings to potential tax breaks—both today and in retirement—Roth IRAs and 401(k)s could deliver on multiple levels when used together.
- An extra $7,000 in savings on top of your 401(k) contributions. The $23,500 401(k) contribution limit for 2025 for employees under 50 is already a good amount (it’s up $500 from 2024), but adding a Roth IRA (or a traditional IRA, for that matter) ups the ante, letting you save an extra $7,000. People aged 50 and up can invest even more with catch-up contributions. People aged 50 and up can add up to an extra $1,000 to their Roth IRA and an extra $7,500 to their 401(k) in 2024. They will stay the same in 2025 if you are 50 to 59 years old or 64 or older. But if you are between the ages of 60 and 63, your employer plan may let you add up to $11,250 more to your 401(k). In other words, in 2025, a person aged 60 to 63 can put up to $34,750 into their 401(k). Note: The amounts listed for contributions are for people who are eligible. This means that if a couple is married, each partner may be able to contribute up to the amounts listed.
- You can get to your money quickly before you retire. Unlike a traditional IRA or 401(k), the Roth IRA is one of the few tax-advantaged accounts that lets you take out the money you’ve put into it whenever you want, without having to pay taxes or penalties. In a pinch, you can use some of your retirement savings this way, without taking on more debt or selling assets in a taxable account, which could have tax effects. It’s best to save at least $1,000 for emergencies separately from your retirement savings, but knowing that you can get to your Roth IRA contributions if you really need them could put your mind at ease. Your Roth IRA could be used as an extra way to save money for emergencies. Roth 401(k)s dont allow for withdrawals of just contributions. If you take money out of your Roth 401(k), some of it may be earnings.
- Tax breaks now and in the future: Putting money into a Roth IRA and a 401(k) could save you money on taxes now and in the future. You can’t deduct contributions to a Roth IRA, but earnings grow tax-free while you save, and most withdrawals made during retirement are tax-free. When you put money into a traditional 401(k), the order is different: pre-tax contributions today lower your taxable income, which can lower your tax bill that year. If you put money into a traditional 401(k) before taxes, the growth of the investments is not taxed right away. When you retire, you take money out at your current income tax rate, minus any money you put in after taxes. You might be able to save money on taxes in retirement by controlling your taxable income since you can choose between tax-free and taxable withdrawals. For example, if you work part-time and still have taxable income, drawing money from a Roth IRA won’t put you in a different tax bracket like taking money out of a 401(k) might. You might have to pay more in income taxes in retirement if you take money out of both your 401(k) and your traditional IRA. This is because withdrawals from both accounts are taxed.
- Lower required minimum distributions (RMDs): Another difference between a Roth IRA and a 401(k) or traditional IRA is that you don’t have to take money out of a Roth IRA after a certain age. However, after age 73, you do have to start taking RMDs from most traditional 401(k) plans and traditional IRAs. This means you can use the money in your Roth IRA whenever it works best for you when you retire. This also means you could leave your loved ones extra money in your Roth IRA without having to pay taxes on it. Remember that required minimum distributions apply to Roth IRAs that are passed down. This will affect your heirs.
What’s the difference between a Roth IRA and a 401(k)?
The biggest difference between a Roth IRA and a 401(k) is that a 401(k) is offered by (and opened through) your employer, while a Roth IRA can be opened on your own through a financial services custodian such as Fidelity. When you contribute to a traditional 401(k), typically the money is taken out of your paycheck before you pay taxes. This reduces your taxable income for the year (though some plans do allow you to make after-tax traditional 401(k) contributions). Roth IRA contributions, on the other hand, are made with money that has already been taxed, so they won’t lower your taxable income. Many employers also offer a match on 401(k) contributions up to a certain percentage of your salary—say, 3% or more—which can boost the amount that goes into your account each year. That is not available for Roth IRAs, as they are not connected to your employer.
You can put your money into both types of accounts and invest it in stocks, bonds, or mutual funds. These investments may grow tax-free while you save. 1 With a 401(k), you’ll typically pay income taxes once you begin making withdrawals—though not on any after-tax contributions—and if you withdraw before age 59½ you may also pay a penalty. 401k plans do have a benefit over IRAs for early withdrawals, however. If you leave your job that sponsors the plan in or after the year you turn 55, you can take money out of the plan without being charged a fee. You can take out as much of your Roth IRA as you put in at any time for any reason, as long as you don’t take out any investment earnings. If you’ve had the account open for at least 5 years and you’re over 59½ years old or you meet certain other qualifications, then you may be able to withdraw investment earnings tax-free and penalty-free. 2.
Some employers offer a second type of 401(k) called a Roth 401(k), which is a kind of hybrid between a Roth IRA and a 401(k) with some rules from each kind of plan. In a Roth 401(k), you invest after-tax money today and dont pay income taxes on your withdrawals in retirement. Learn more about contributing to a Roth vs. traditional 401(k).