Question

What is the tax and penalty effects of nonqualified distributions of Roth 401(k) accounts?

a) Taxable with Penalty
b) Taxable without Penalty
c) Nontaxable with Penalty
d) Nontaxable without Penalty

Answer 1

A nonqualified distribution from a Roth 401(k) account is taxable with penalty. Distributions must meet certain criteria to be qualified and thus tax-free. Otherwise, the distribution is taxed as income with an additional 10% penalty.

Step-by-step explanation:

The tax and penalty effects of a nonqualified distribution from a Roth 401(k) account are that it is a) taxable with penalty. A Roth 401(k) allows for qualified distributions to be made tax-free, as taxes are already paid on the contributions. However, for a distribution to be qualified, it generally must be made after the account has been held for at least five years, and the participant has reached the age of 59½, become disabled, or died. Nonqualified distributions from a Roth 401(k) are included in gross income to the extent that they exceed previously taxed contributions and are subject to an additional 10% penalty unless an exception applies.

In comparison, a traditional IRA involves tax deferral, which means the money is not taxed at the time of contribution, but it is taxed upon withdrawal. The main goal of both Roth 401(k) accounts and traditional IRA is to encourage long-term savings by offering certain tax advantages.