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) $0.
B) $10,000.
C) $12,000.
D) $18,000.
E) $30,000.

Question

Quizplus · Accepted Answer

Heidi is not taxed on 40% of the distribution because this is considered a return of her nondeductible contribution. The 40% is the amount of her contributions divided by the value of the account ($20,000/$50,000). The remaining 60% ($18,000) is subject to tax and penalties. Note that the distribution is nonqualified because Heidi is not 59½ years of age at the time of the distribution (she had the Roth open for more than five years). Because she had not reached age 59½ at the time she received the distribution, she is penalized on the earnings she received in the distribution.

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