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Do I have to invest my Solo 401k contributions to take advantage of tax deferral

Personal Finance & Money Asked by Maxim Neaga on March 25, 2021

Is simply contributing to my solo 401k account and keeping it in cash balance enough to take advantage of tax deferral, or do the funds need to be invested?

One Answer

Is simply ... keeping it in cash balance enough to take advantage of tax deferral

Yes, because the amount you contribute to the 401(k) is deducted from this year's income (EDIT: he didn't mention Roth), to be paid when you withdraw it many years from now.

However, by keeping it in cash, you are:

  1. missing out on all that tax free deferred investment growth: capital gains, dividends and interest (both reinvested), and
  2. losing to inflation.

Thus, at the very least invest in high quality (government or corporate) bond funds so as come close to keeping pace with inflation.

Correct answer by RonJohn on March 25, 2021

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