One of the reasons investors like Roth IRAs is that you can often withdraw or distribute, at least part of your money without penalty.

Does the same apply to the Roth portion of your Solo 401k?

Before we discuss how you might proceed, we strongly recommend you engage your CPA to help you calculate your basis and determine if the pro-rata distribution rule applies to your situation and only to proceed under the guidance and advisement of your qualified tax professional. You'll want to work with your CPA to ensure any taxes owed are paid if you are distributing funds from the retirement account, or leave the money in the Roth 401k until a direct rollover to another designated Roth account or Roth IRA is possible.

Qualified and Non-Qualified Accounts:

Just like a Roth IRA, the Roth 401k can become "qualified" if two of the following stipulations are met:

  1. You are age 59.5 or older and

  2. The Roth 401k has been funded for 5 years or longer

Distributions may generally be taken from a qualified account without taxes owed. Distributions from a non-qualified account will generally incur some taxes.

The Roth 401k and Roth IRA five-year clock are different and separate. Just because you've had a Roth IRA open for longer than five years, does not extend to your Roth 401k.

If you meet both of the qualifications above and your Roth 401k is considered qualified, it is generally understood you can withdraw the Roth 401k funds without penalty. 

If you meet both of the qualifications above, and you do a direct rollover to a Roth IRA, a new 5-year clock will begin and earnings may be taxable during that time. 

Always check with your CPA before moving the funds out of the retirement account.

If your Roth 401k is not qualified, then your Roth 401k funds contain two types of money:

  1. Roth 401k contributions (also called basis, this is after-tax money, generally non-taxable)

  2. Earnings on Roth 401k money (taxable, for a while, and potentially subject to 10% penalty)

Because there's essentially two types of money, pre and after tax, in one category (Roth 401k), the IRS will want to collect taxes if you distribute the pre-tax money (earnings on Roth 401k funds) before the Roth 401k is qualified.

To figure out which part of the money is taxable, and which is not, the pro-rata distribution rule often applies.

What is the pro-rata distribution rule?

The pro-rata distribution rule is used to determine which portion of the distribution would be taxable and which would not. 

Example: You have $10,000 in Roth 401k funds. You contributed $7,000 and the other $3,000 was growth/earnings from your investments. Generally speaking, 70% of any distribution would be considered non-taxable (since that's what you contributed), and 30% would be taxable. If you are under age 59.5, that 30% could also be subject to a 10% penalty. 

The 10% penalty will apply to you unless:

  • You are age 59.5 or older

  • You are dead and the distribution is coming from your estate

  • You are disabled

  • You have a QDRO (qualified domestic relations order) and must remove the funds from the plan

  • You have a levy on the plan from the IRS

  • etc.

Who's responsible for determining if the pro-rata rule applies?

You are, as the 401k plan administrator. Always work with your tax professional before moving the funds out of the retirement account.

Check out the screenshot below from the Solo 401k Summary Plan Description (found in your 401k plan documents):

What about rolling Roth 401k funds into a Roth IRA? Read here to learn more.


Click here to learn more from the IRS about Designated Roth Accounts

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