Roth IRA Vs Roth Solo 401k: Main Differences & Similarities

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Both the Roth Solo 401k and the Roth IRA are funded with post-tax dollars. You contribute with income that’s already been taxed, but you don’t pay any taxes when you withdraw from either of the two accounts in retirement. In other words, your money compounds tax free, and then you get to keep everything when you decide to take the money out. They’re both great retirement accounts, but there are some key differences between the two.

It’s easier to open a Roth IRA than a Roth Solo 401k

The Roth IRA is more popular than the Roth solo 401k, not because it’s better, but because not everyone qualifies for the superior Roth solo 401k. A Roth solo 401k is just one part of a solo 401k account. You need to qualify for a solo 401k first, in order to consider contributing to the Roth portion of the plan.

How do you qualify for a solo 401k?

A solo 401k has two basic eligibility requirements:

If you meet these conditions, you can open a solo 401k account and consider contributing to the Roth option. Note: Not all solo 401k providers offer a Roth option. Here’s a look at some of the best solo 401k plan providers and the features they offer.

The Roth IRA, on the other hand, doesn’t have any self-employment requirements. Anyone with earned income can open an account and make contributions. Whether you make that income working as a full-time employee at a company, or through self-employment, both are eligible.

Contribution Limits

While the Roth IRA is more accessible than a Roth solo 401k, it comes with a much lower contribution limit.

In fact, a Roth solo 401k has a limit three times larger than a Roth IRA. The contribution limit for a Roth solo 401k is $22,500 ($30,000 if age 50+) for 2023 and $23,000 ($30,500 if age 50+) for 2024. In comparison, the contribution limit for a Roth IRA is just $6,500 ($7,500 if age 50+) for 2023 and $7,000 ($8,000 if age 50+) for 2024.

If you’re trying to save for retirement, it’s worth looking into opening a solo 401k account for the higher contribution limits alone. Due to the small contribution limit of a Roth IRA, most people don’t consider it as their only retirement account. Usually, they’ll have a Roth IRA in addition to a corporate 401k that they might receive from their employer, or a SEP IRA.

On the other hand, with a solo 401k, the Roth option is only one part of your account. You also contribute on the employer side, bringing your total contribution limit to $66,000 ($73,500 if age 50+) for 2023 and $69,000 ($76,500 if age 50+) for 2024. Furthermore, using the Mega Backdoor Roth strategy with a solo 401k, you could technically contribute up to $66,000 into a Roth solo 401k for 2023.

You can rollover funds from any retirement account into a solo 401k, with the only exception being a Roth IRA.

Income Restrictions

In addition to a lower contribution limit, the Roth IRA also comes with income limits. If your income is too high, your contribution limit can get reduced even further, or you may not be able to contribute anything at all. 

Roth IRA income limits for 2023.

To be able to make the full contribution into a Roth IRA for 2023, your income must be under $138,000.

Roth IRA income limits for 2024.

To be able to make the full contribution into a Roth IRA for 2024, your income must be under $146,000.

In other words, if you make a lot of money, the Roth IRA isn’t for you. However, you still have the option to do a backdoor Roth IRA by contributing to a traditional IRA (which has no income restrictions for making contributions) first, and then convert the funds into your Roth IRA. The Roth solo 401k has no income restrictions.

Also read: Roth IRA vs Traditional IRA

Age requirements

One area where the Roth IRA is better than the Roth solo 401k is the lack of any minimum age requirement.

There is no minimum age to set up a Roth IRA. Even if you’re an elementary school student with a paper route, you can set one up. Even though the contribution limit for a Roth IRA is much smaller than a Roth solo 401k, minors can start compounding their money at an earlier age. And unless you’re making bank as a superstar YouTuber in 8th grade, you likely don’t have to worry about the income restriction. Given that the Roth IRA is simpler to open and set up, it’s a better option if you want to start contributing small amounts each year before you reach adulthood.

NOTE: A Roth IRA set up by minors will be treated as a custodial account. The minors’ guardian must serve as the custodian of the account until they turn 18 years old.

Are minors not allowed to set up a Roth solo 401k account? Yes and no. It depends on the plan provider. Most 401k plans typically don’t have any custodial options for minors.

Investment options

With a regular Roth IRA, you can invest in traditional assets like stocks, bonds, mutual funds, and ETFs. A solo 401k lets you invest in any asset class, including alternative assets like real estate, cryptocurrencies, precious metals, and private equity.

If you wanted to invest in alternative assets through a Roth IRA, you would need to open a self-directed IRA or a self-directed IRA with checkbook control. A self-directed IRA gives you access to alternative investments, but you’ll still have to make all purchases through a custodian. A self-directed IRA with checkbook control removes the need to request purchases from your custodian, and allows you to make investments directly.

Withdrawal rules

For both the Roth IRA and the Roth solo 401k, the eligible age to withdraw from your account with no penalties is 59½. Any early withdrawals will get hit with a 10% fee plus income tax on the amount drawn.

The Roth IRA and Roth solo 401k both have a 5-year rule, which states that you cannot withdraw any earnings until you’ve held your account for at least 5 years, even if you’re over the age of 59½. However, only the Roth IRA allows you to withdraw only your contributions from your account with no penalty at any age.

The Roth solo 401k doesn’t have an option for early contribution withdrawals. Any early withdrawals made are subject to the same fee of 10% plus income tax on the amount you withdraw.

Wrapping Up

Due to the much higher contribution limit, a Roth solo 401k is the superior investment vehicle if your goal is to save as much as you can for retirement. However, not everyone qualifies since you need to have self-employment activity with no employees.

The Roth solo 401k also has no income requirements, while high income earners are ineligible for a Roth IRA. However, the Roth IRA has no age requirements, making it a good choice for minors to start saving and compounding their money from an early age.