Distribution from a Roth solo 401k that are not deemed “Roth solo 401k qualified distributions” will be subject to the pro-rata basis distribution rules. This means the Roth solo 401k distributions will consist partly of the after-tax contributions and partly of the pre-tax earnings in the Roth solo 401(k) account. The taxable portion of the Roth solo 401k distribution will be subject to the mandatory 20% withholding when the distribution is eligible for rollover. However, non-qualified Roth solo 401k distributions can be directly rolled over in their entirety to Roth IRAs or other full-time Roth 401k employer plans.
Jason made his first deferral to his Roth solo 401(k) in 2011. Jason is 53 in 2017 and is considering taking an early retirement. Any distribution Jason takes from his Roth solo 401(k) will not be a qualified distribution, because Jason has not yet reached age 59½. Jason has $80,000 in after-tax deferrals in his Roth solo 401(k) and $40,000 in earnings for a total balance of $120,000 as of December 2017. Jason decides to retire early and will start taking Roth solo 401(k) distribution. In December2017, he takes a distribution of $20,000 from his Roth solo 401k account. His distribution will be 66% tax-free and 34% taxable ($80,000/$120,000 = 66% of the account is after-tax funds). That means that $13,200 of his distribution is income tax free. The remaining $6,800 is taxable, subject to 20% mandatory, federal tax withholding, and also subject to the 10% early distribution penalty unless an exception to the penalty applies. Once Jason reaches age 59½, his distributions will fall under the “qualified Roth solo 401k distribution” rules and can be distributed tax and penalty free.