Whether a Roth IRA or a designated Roth solo 401k, all distributions from either account type will be tax-free if certain IRS rules are satisfied. This type of distribution falls under a “qualified” distribution.
However, if the distribution is deemed “nonqualified,” the earnings won’t be tax-free. What is more, distribution ordering rules apply which are different for a Roth IRA and a Roth solo 401k.
Non Qualified Roth Solo 401k Distributions
Roth solo 401k distributions are taxed based on a pro rata share of nontaxable contributions and taxable earnings. In other words, some of the gains are taxable and some of the basis are not–you have to take out some of the basis and some of the gains.
No-Qualified Roth IRA Distributions
Roth IRA distributions have ordering rules which don’t apply to Roth solo 401k plans. Under these ordering rules, Roth IRA distributions first consist of contributions. Once you have exhausted the distributions from the amount contributed, you can then, but are not required, distribute any conversions. Lastly, any funds rolled over from a prior employer plan may also be distributed.
The 10% Early Distribution Penalty
Lastly, the 10% early distribution applies to gains distributed from the Roth solo 401k or the Roth IRA if at the time of the distribution the Roth IRA owner or the Roth Solo 401k participant is under age 59 1/2.
