Heidi, age 45, has contributed $20,000 in total to her Roth 401(k) account over a six-year period. When her account was worth $50,000 and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified distribution from the account. How much of the distribution will be subject to income tax and 10% penalty?
A) $30,000.
B) $0.
C) $12,000.
D) $10,000.
E) $18,000.

Question

Quizplus · Accepted Answer

Since Heidi has only contributed $20,000 over the years, the remaining $10,000 of the distribution is earnings on the contributions. This portion of the distribution is subject to income tax plus a 10% penalty since she is under 59 ½ years old. Therefore, $18,000 of the distribution ($10,000 earnings + $8,000 penalty) will be subject to income tax and penalty.

Heidi, Age 45, Has Contributed $20,000 in Total to Her