Question

Heidi (age 57) invested $4,000 in her Roth 401(k) on January 1, 2012. This was her only contribution to the account. On July 1, 2020, when the account balance was $6,000, she received a nonqualified distribution of $4,500. What is the taxable portion of the distribution and what amount of early distribution penalty will Heidi be required to pay on the distribution

Answer 1

$450

Step-by-step explanation:

For a ROTH 401 (k) qualified distribution to be non-taxable, either of the following conditions should be met:

1. Individual should be more 59 and a half years old or more.

2. Has held the account for 5 years or more.

In this case, Heidi invested at the age of 57 and received distribution of $4,500 after 8 years. So she meets both criteria but the type of distribution she received is a non-qualified one. So, $4,500 is subject to tax as per ordinary income at 10% that is $450 (0.1*4,500).

Heidi is not subject to any amount if early distribution penalty as she meets both criteria.