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S-Corp Employer Roth Solo 401k Contributions — How Are They Taxed?
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I operate an S-Corp and I’ve been reading about employer Roth Solo 401k contributions — the idea of getting a business-side deduction while building Roth savings sounds great. But I also read there’s a “taxable in-plan conversion” involved. Can someone explain the full tax picture here? Does this actually make sense to do?
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Employer Roth Solo 401k contributions are a unique and somewhat “quirky” arrangement that involves both a business-side benefit and a personal-side tax obligation in the same year. Understanding both sides is essential before deciding whether this strategy makes sense.
Here is the full tax picture:
- Business side (S-Corp): The employer Roth contribution — up to 25% of the participant’s W-2 wages from the S-Corp — reduces the S-Corp’s taxable income on Form 1120-S. This is the same tax treatment as a standard pre-tax employer profit-sharing contribution.
- Personal side (in-plan conversion required): However, IRS rules require that the employer Roth contribution be treated as a taxable in-plan Roth conversion in the same tax year. The full contribution amount is included in the participant’s personal taxable income and reported via Form 1099-R.
- Future distributions: Qualified distributions from the Roth Solo 401k — after the five-year holding period and at age 59½ or older — are completely tax-free and penalty-free.
Examplel: An S-Corp owner with $100,000 in W-2 wages contributes $25,000 (25% × $100,000) as an employer Roth Solo 401k contribution for 2026. The S-Corp’s taxable income on Form 1120-S is reduced by $25,000. The owner then reports that same $25,000 as a taxable in-plan conversion on their personal return — paying income tax on it in 2026. Going forward, that $25,000 and all its earnings grow tax-free inside the Roth Solo 401k.
This strategy typically only makes sense for S-Corps — not for sole proprietorships or partnerships — because the payroll tax savings at the S-Corp level create an additional benefit that makes the strategy more compelling on a net-after-tax basis.
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My Solo 401k Financial offers self-directed Solo 401k, IRA LLC & ROBS 401K Retirement Plans. Learn about Long Awaited Clarity Arrives: IRS Releases Secure Act 2.0 Employer Roth 401k Including Roth Solo 401k Designated Contribution Reporting Rules In Notice 2024-2, … Continue reading
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