An individual or “solo” 401(k) plan is a type of employer retirement account that can be opened by individuals who are either the sole full-time employee or who are paid as independent contractors with self-employment income.

Solo 401(k) participants are allowed to contribute to the account in the same way as larger employer 401(k) participants. They can elect to defer up to the employee elective deferral contribution limit to a traditional pre-tax side of the plan or, if the plan document allows, to a post-tax Roth side of the plan. In 2024, the annual employee deferral limit is $23,000. Also, participants who are age 50 and older are permitted an additional $7,500 catch-up contribution limit on top of this.

Optionally, you can also make employer contributions for yourself as long as you have net earnings from the trade or business for which the plan was set up.

This year, Schwab announced that, “Effective January 5, 2024, as part of SECURE Act 2.0 legislation, an Individual Roth 401(k) plan will be a new account registration type available to Schwab clients.”

The bulletin goes on to say:

Things to know:

• Individual Roth 401(k) plans allow for after-tax contributions that provide tax-free growth and tax-free withdrawals if certain conditions are met.
• Most other features of individual Roth 401(k) plans are like those of individual 401(k) plans.
• When a participant’s income exceeds $145,000 in the prior tax year, SECURE 2.0 requires catch-up contributions for qualified plans to be characterized as Roth contributions.

[Note that Schwab is oversimplifying the details of this SECURE 2.0 update. For the full context, review our article “New Catch-Up Limits for Ages 60-63 in 2025 (Secure 2.0).”]

• The ability to make contributions to an individual Roth 401(k) plan will not go into effect until plan year 2024.
• Once the individual Roth 401(k) plan is available, if a client chooses to establish both a traditional individual 401(k) account and a Roth 401(k) account, an account application will be required for each account.

Important notes:

• Clients will be sent a Roth 401(k) Amendment allowing the new Roth salary deferral feature to their existing Individual 401k plan. The Roth amendment is anticipated to be sent on or around January 17. Clients should not return to Schwab; instead, they should sign, date and retain for their records. Existing clients with an established I401(K) account will not be required to repaper with a new I401(k) Adoption Agreement to open a Roth I401(k).
• The I401K application & Adoption Agreement will be updated and available as of January 5, 2024, to include the new Roth I401(k). For existing plans only, if adding a Roth to an established I401(k) plan, the grace period to accept older form versions will be until April 5, 2024. Note: To open a new Roth I401K plan, the new application and Adoption Agreement must be submitted. Older form versions will not be accepted.

As many of our readers know, we are big fans of Roth accounts here at Marotta Wealth Management, and we are excited that Schwab has added the individual Roth 401(k) to their account offerings.

We wrote about the benefits of opening an individual 401(k) at Charles Schwab vs. other self-employed retirement accounts in the article, “Q&A: Which Self-Employed Retirement Plan Should I Open?” Those benefits include:

• Free to set up
• Doesn’t interfere with backdoor Roth regardless of balance
• Permits employee contributions / can have a higher contribution limit

We can now add to the list:

• Permits Roth employee contributions and Roth employer match, but not Roth employer profit sharing
• Permits in-service rollovers of employee contributions, employer match, as well as profit sharing to an IRA before age 59 1/2 or retirement

In-plan Roth conversions from a traditional i401(k) account to a Roth i401(k) account are not allowed by Schwab. However, this does not have to limit your Roth conversion strategy. Because Schwab permits you to rollover any contribution source into an IRA, you can perform a rollover followed by an out-of-plan IRA Roth conversion whenever you’d like.

We recommend that existing clients of Charles Schwab who have already established a traditional individual 401(k) account add a Roth individual 401(k) account to their plan by completing a new Schwab Individual 401(k) Account Application and noting the account number of their existing Schwab i401(k) plan on the account application.

For new clients, if you are establishing a new i401(k) plan for the first time with Schwab, you will need a completed Individual 401(k) Adoption Agreement along with two signed individual 401(k) account applications: one for a traditional individual 401(k) account and one for a Roth individual 401(k) account.

If you have questions about Schwab’s new Roth individual 401(k) offering or other Schwab processes, either visit Schwab’s Individual 401(k) Plan —Traditional & Roth website or call Schwab Alliance at 800-515-2157 to speak with a Schwab Alliance team member directly.

Photo by Carrie Beth Williams on Unsplash. Image has been cropped.