Question

When a nonqualified distribution is received from a Roth IRA, what is the deemed order of the funds distributed?

Answer 1

When a nonqualified distribution is received from a Roth IRA, the funds are distributed in this order: first, regular contributions; second, conversion and rollover contributions on a FIFO basis; and third, earnings on contributions. Nonqualified distributions may be subject to taxes and penalties.

Step-by-step explanation:

When a nonqualified distribution is received from a Roth IRA, the funds are distributed according to specific ordering rules set by the IRS. The deemed order of funds distributed is as follows:

1. Regular contributions are distributed first.
2. Second are conversion and rollover contributions, on a first-in, first-out basis (FIFO).
3. Lastly, earnings on the contributions are distributed.

Nonqualified distributions are those that do not meet the criteria for a qualified distribution, which generally means the account is less than five years old and the owner is under 59 and a half years old. Unlike a Traditional IRA, which taxes the lump sum upon withdrawal, a Roth IRA's contributions are made with after-tax dollars, therefore regular contributions can be withdrawn tax-free and penalty-free at any time. However, earnings and conversions withdrawn as part of a nonqualified distribution may be subject to taxes and penalties. It is essential to understand these rules to avoid any unexpected tax implications when taking distributions from a Roth IRA.