Once the you have had the Roth solo 401k for 5 years and are age 59 1/2 or oler, you can take tax free distributions of both the contributions and the earnings that have accumulated in the Roth Solo 401k. The 5 year clock on the Roth solo 401k starts when funds were first contributed to the Roth Solo 401k as described on the following page: https://www.mysolo401k.net/daily-solo-401k-question-when-does-the-5-year-clock-start-for-qualified-roth-solo-401k-distributions/
If you make a distribution prior to meeting both qualified distribution requirements (i.e., the 5 year rule and the age 59 1/2 or older rule) , then the distribution will be deemed non-qualified and subject to the pro-rata rules where a potion will be tax free and a portion will be taxable. Pro-Rata Rule Applies A distribution that is not a qualified distribution is subject to the pro-rata rule. A portion of every distribution taken will be considered taxable and a portion will be considered nontaxable. The non-taxable amount of the distribution is generally determined by dividing the employee’s deferrals (basis) by the balance in the Roth solo 401(k) account and multiplying the amount distributed by the result. Unfortunately, the favorable ordering rules used to determine the taxation of a distribution from a Roth IRA do not apply to Roth 401(k)s.
Example: Fred has deferred a total of $30,000 to his Roth Solo 401(k) and has a total balance in the account of $40,000. He then takes a nonqualified distribution of $12,000. $9,000 of the distribution will be tax free. ($30,000 / $40,000 = .75) ($12,000 x .75 = $9,000).
