Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year period. In 2014, 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) $0
B) $10,000
C) $12,000
D) $18,000
E) $30,000

Question

Quizplus · Accepted Answer

The $20,000 that Heidi contributed to her Roth 401(k) account is already after-tax money, meaning she has already paid taxes on it. Therefore, this portion of the distribution is not subject to income tax or penalty.

The remaining $30,000 represents investment earnings and growth in the account, which are taxable and subject to penalty if withdrawn before age 59 1/2. Since Heidi took a nonqualified distribution, the entire $30,000 is subject to income tax and a 10% early withdrawal penalty, totaling $18,000 ($30,000 x 0.10 + $30,000 x her marginal tax rate). Therefore, the answer is D.

Heidi Has Contributed $20,000 in Total to Her Roth 401(k)