A participant of a Solo 401K Plan that offers a Roth sub-account will be able to make employee contributions to the Plan and designate where the contribution will be treated as pre-tax or Roth (after-tax). In 2011, an employee can defer up to $16,500 annually if the employee is under the age of 50 or $22,000 if the employee is over the age of 50. The employee deferral contributions can be made in either pre-tax or after-tax (Roth). The difference between making a pre-tax or Roth employee deferral contribution is based on the tax treatment of the contribution. With a pre-tax contribution, the employee would get a tax deduction for making the employee contribution, but would be subject to tax upon taking a distribution after the age of 59/1/2 (a 10% penalty would be imposed on a distribution prior to the age of 591/2). In the case of an after-tax (Roth) contribution, the amount contributed is after-tax meaning the employee would not get a tax deduction for the contribution, however, after the age of 591/2, the employee would be able to take a tax distribution without tax.
Roth 401k contributions will be subject to the same rules as traditional Roth IRA accounts: To be eligible for the tax free status, all contributions must be in the account for at least five years and cannot be withdrawn before the age of 591/1 (qualified distribution). In other words, to get tax-free treatment on a Roth distribution, the individual must be over the age of 59/1/2 and the Roth 401K contribution must have been opened for at least 5 years.