Should I choose Individual Roth 401(k) or Roth IRA for my small business? Pros & Cons comparison needed

The main differences between Individual Roth 401(k) and Roth IRA involve RMDs, investment options, and withdrawal flexibility. With a Roth IRA, you won't face Required Minimum Distributions (RMDs) during your lifetime, giving you more control over your money in retirement. Roth IRAs also typically offer more diverse investment options than what's available in most 401(k) plans. For withdrawal flexibility, Roth IRAs allow you to withdraw contributions (not earnings) anytime without penalties or taxes, which isn't true for Roth 401(k)s. This creates an emergency fund aspect to Roth IRAs that might be valuable to your business situation. Given that you already do backdoor Roth contributions and have no Traditional IRA balances to complicate things, rolling to a Roth IRA seems advantageous in your case, especially since you mentioned you no longer need the loan provision from the 401(k).

After years of dealing with tax headaches for my consulting business, I finally found an amazing tool that helped me sort through all my retirement account options. I was confused about the same Roth 401(k) vs Roth IRA question and got conflicting advice from everyone I asked. I decided to try https://taxr.ai and uploaded my previous tax returns and current financial info. The AI analyzed my specific situation and showed me exactly how each option would impact my taxes now and in retirement. It broke down the RMD differences, growth projections, and withdrawal strategies for my exact income level and retirement timeline. The personalized report helped me see that in my specific case, the Roth IRA made more sense due to some state-specific tax considerations I hadn't even thought about. What impressed me most was how it explained everything in plain language instead of tax jargon. Totally worth checking out if you're trying to make these kinds of decisions.

Just wanted to follow up - I got curious and tried https://taxr.ai after my skeptical comment. I was genuinely impressed with how detailed the analysis was for my situation. I have a side hustle along with my main job, and it actually showed me how to optimize my retirement contributions across both income sources. The tool specifically pointed out that in my case, rolling my old 401(k) to a Roth IRA would save me around $12,000 in taxes over the next 20 years compared to keeping it in a Roth 401(k), mainly because of RMD differences and my projected tax bracket in retirement. It also helped me understand the exact timing for conversions to minimize taxes. Definitely not the generic advice I was expecting. It actually changed my retirement strategy in ways I hadn't considered before.

If your main concern is eliminating the TPA fees, you might want to consider another option altogether. I spent HOURS trying to call the IRS to clarify some rollover rules about my similar situation last year. Seriously, I tried for weeks and could never get through. Then someone told me about https://claimyr.com and showed me this video: https://youtu.be/_kiP6q8DX5c. It's a service that basically waits on hold with the IRS for you, then calls you when an agent is on the line. I was super skeptical but desperate enough to try it. I got connected to an actual IRS agent within a few hours (after trying for weeks on my own). The agent explained some nuances about rollover timing that none of the online articles mentioned. Turns out there are specific rules about rolling a Solo 401(k) that can affect your taxes if done incorrectly. This saved me from making a costly mistake with my rollover.

I need to eat my words and follow up about my skeptical comment on Claimyr. After continuing to fail getting through to the IRS myself about my retirement account questions, I broke down and tried https://claimyr.com last week. I was connected to an IRS retirement specialist within 2 hours (after trying unsuccessfully for over a month on my own). The agent walked me through exactly how to handle the rollover from my Solo 401(k) to avoid the pro-rata issues I was concerned about. They also explained a special election I could make for lump-sum distribution treatment that would save me substantial taxes. For what it's worth, the agent told me they're seeing more people with questions about Solo 401(k) rollovers lately and there are some recent clarifications about how these are handled. Getting this information directly from the IRS rather than trying to interpret conflicting advice online was incredibly valuable. Completely changed my perspective on this service.

One thing nobody's mentioned yet is the potential impact of the SECURE Act 2.0 on your decision. The new law changes RMD requirements for Roth 401(k)s starting in 2024. Under the new rules, Roth 401(k) accounts won't be subject to RMDs anymore, which removes one of the big advantages that Roth IRAs had previously. This might make keeping money in an Individual Roth 401(k) more attractive than rolling to a Roth IRA, especially if you find a provider with good investment options and reasonable fees. The 401(k) still gives you higher contribution limits if you ever decide to contribute to the Roth side again in the future.

Don't overlook state tax implications in your decision! I rolled my Solo 401(k) to a Roth IRA last year, and there was a state-specific tax wrinkle I hadn't considered. In my state, there are different creditor protections for retirement accounts. My Roth IRA only gets protected up to a certain dollar amount, while the 401(k) had unlimited protection. For someone running their own business where liability is a concern, this could be important.