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 percent penalty?
A)$0.
B)$10,000.
C)$12,000.
D)$18,000.
E)$30,000.

Question

Quizplus · Accepted Answer

Out of the $30,000 nonqualified distribution, the first in order to be distributed would be the earnings, and the remaining would come from the contribution or the principal portion of the account. Since Heidi has contributed $20,000 over the years, the remaining $10,000 from the distribution would be considered earnings, which would be subject to income tax and a 10% penalty since the distribution was made before age 59 1/2. Therefore the amount subject to income tax and 10% penalty would be $10,000 in this case.

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