How to open Self-Directed Roth 401k

The Self-Directed Roth 401k is really popular right now in light of evident future tax increases by the government. Those looking to open self-directed Roth 401k should be aware of the following:

The term self-directed Roth 401k is commonly used to describe the Roth option available within the Self-Directed Solo 401k.  In other words, a self-directed Roth 401k is not a separate type of Solo 401k, but rather part of the Solo 401k. This means that amounts designated/treated as Roth Solo 401k deferrals/contributions require maintained in a separate Roth deferral account—checking account or brokerage account in the case of a self-directed Solo 401k.

  

This may sound confusing to those that are new to the Self-Directed Solo 401k concept, but the following illustration should clarify the separate Roth Solo 401k accounting requirement

Separate Roth Solo 401k Accounting Example:

Fred, who is self-employed through his landscaping business with no full-time employees, decides to open Solo 401k titled “Precise Landscape Solo 401k Trust” and plans to make both after tax contributions (Roth) and pre-tax contributions (non Roth contributions).

Further, because the 401k rules require separate tracking of Roth and pre-tax contributions, Fred opens the following two checking accounts at his local bank for his Solo 401k plan, titled:

Bank Account 1: Precise Landscape Solo 401k Trust (Roth)

Bank Account 2: Precise Landscape Solo 401k Trust 

As you can see, Fred has not opened two Solo 401k plans, but instead two separate checking accounts. Therefore, Fred will be in compliance with the regulations as long as he separately tracks Roth vs. pre-tax contributions as well as investment gains.

Lastly, not all Solo 401k providers plan documents allow for Roth Solo 401k contributions, so make sure to first inquire if their Solo 401k plan document allows for Roth Solo 401k contributions before engaging their service.