government may say you can use 529 money for K-12 expenses, a state may consider such a withdrawal a
non-qualified distribution and could charge you penalties, said Steffen.
Finally, even when a
non-qualified distribution is made, the amount otherwise subject to taxation will not be subject to the 10% penalty tax if the distribution is used for qualified education expense or a first-time home purchase as discussed above.
Once an investor turns 65, however,
non-qualified distributions are taxed penalty-free, just like 401(k) distributions.
Instead of following ordering rules,
non-qualified distributions from designated Roth accounts generally consist of a pro-rata portion of after-tax funds (i.e., DRA salary deferrals and in-plan Roth conversion amounts) and pre-tax funds (earnings).
Non-qualified distributions of any amount attributable to the qualified rollover are considered an investment in the contract, or recovery of basis, and not subject to early withdrawal penalties.
These
non-qualified distributions from Roth IRAs are treated as made first from contributions other than rollover contributions, then from qualified rollover contributions and finally, from any earnings on the contributions.
