2026 Tax Bomb Makes the Solo 401k Roth Look Better Than Ever
Trump’s Tax Cuts and Jobs Act creates a 2026 Minimum Required Distribution income tax bullet, making Solo Roth 401k a better contribution option now than before.
With the old tax rates, it made sense to use traditional tax-deductible Solo 401 (k) contributions. But with the new tax rates, the pre-tax decision needs to be re-examined. Roth contributions, while not initially deductible, grow tax-free and can be much more beneficial in your later years.
TCJA lowered the personal marginal tax rates that will rise again in 2026. This means that putting money into a Solo 401k Roth now can turn into a big increase in your wealth later on.
With the potential to return to higher tax rates in 2026 and beyond, adding accounts like Solo Roth 401k requires a second look. WHY? Starting at age 70½, a formula designed by the IRS tells you the minimum amount you should start taking out of retirement accounts as taxable income. This additional income on your tax return:
- often pushes your income to the next highest tax bracket,
- can make more of your Social Security taxable, and also,
- it can result in higher Medicare Part B premiums.
RMDs can create a tax bomb in 2026. Throw in higher rates when that bomb hits in 2026 and, bang, your net earnings in retirement can take a big hit on income taxes.
By using the lower tax rates starting in 2018, you will have a tax rate advantage when rates increase again in 2026.
Consider this: Under lower tax rules, before age 70, you convert a portion of your pre-tax Solo 401k to a Roth Solo 401k, and only pay taxes at the rates of 10% and 12%. Starting in 2026, after turning 70 1/2, without this strategy, you would be taxed at the highest marginal rates of 25% and 28%. Using the Roth conversion strategy, you pay taxes at 12 cents on the dollar today, instead of 25-28 cents or more on the dollar later. That’s a tax advantage you don’t want to miss out on.
Regarding income limitations, if your 2018 adjusted gross income 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 age 50 or older. If you have a working spouse who has earned income, your spouse can also make a Solo 401k Roth contribution. With a 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. Smart planning means finding ways to put money into a Roth Solo 401k to help expand your savings. With the new tax laws, calculating a little now can mean thousands of tax savings down the road.
Do you have any questions?