The Trump Tax Cut & Jobs Act creates a 2026 Required Minimum Distribution income tax bullet making the Solo Roth 401k a better contribution option now than before.
Under the old tax rates, it made sense to use traditional pre-tax deductible Solo 401(k) contributions. But with new tax rates, the pre-tax decision needs to be re-examined. The Roth contributions, although not initially deductible, grow tax-free and may be far more beneficial in your later years.
TCJA lowered personal marginal tax rates that will go back up in 2026. This means getting money into a Solo 401k Roth now can turn into a big increase in your wealth later
With the potential to return to higher tax rates in 2026 and beyond, adding to accounts such as the Solo Roth 401k requires a second look. WHY? Starting at 70 1/2 age, an IRS designed formula tells you the minimum amount you must start taking out of retirement accounts – as taxable income. This extra income on your tax return:
- often pushes your income into the next higher tax bracket,
- can make more of your Social Security taxable, and also,
- may lead to higher Medicare Part B premiums.
RMDs can create a 2026 tax-bomb. Add on higher rates when that bomb hits in 2026, and wham, your net earnings in retirement can take a big income tax hit.
Using the lower tax rates starting in 2018, you’ll have a tax rate advantage when the rates rise again in 2026.
Consider this: Under the lower tax rules, before age 70, you convert a portion of your pre-tax Solo 401k to a Solo 401k Roth, and only pay taxes at the 10% and 12% rates. Starting in 2026, after reaching age 70½, without this strategy, you would be subject to tax rates at the higher marginal rates of 25% and 28%. By using the Roth conversion strategy, you pay taxes at 12 cents on the dollar today, instead of 25-28 cents or more per dollar later. That’s a tax rate advantage you don’t want to miss.
As far as the income limitations, if your adjusted gross income in 2018 is less than $275,000, you can make an annual contribution to a Solo 401k Roth of $18,500 if you are under age 50 or $24,500 if you are 50 or older. If you have a spouse working with you, who has earned income, your spouse can make a Solo 401k Roth contribution as well. With smart review, there is usually a way to get money into a Solo Roth 401k.
Those within a few years of retirement aren’t the only ones who should take another look at Solo 401k Roth. Shrewd planning means finding ways to get money into a Solo 401k Roth to help amplify your savings. With the new tax laws, a little figuring now can mean thousands in tax savings later.