Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: My client is taking a nonqualified distribution from his only Roth IRA. The client has made regular contributions to the Roth, and rollover contributions from a converted traditional IRA. How will distributions be treated?
Answer: Nonqualified distributions from a Roth IRA come out in the following order:
- Regular contributions
- Converted amounts
Regular contributions are recovered federal income tax-free. Converted amounts are also federal income tax-free. However, converted amounts taken within five years of the conversion while the taxpayer is younger than age 59 ½ will potentially be subject to the 10% premature distribution penalty tax.
Distributions of earnings are income taxable, and also subject to the 10% premature distribution penalty tax.
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