The penalty tax for a
nonqualified distribution from an HSA is 20 percent.
On the other hand, the penalty may apply to all or a portion of a
nonqualified distribution. That is, the penalty may apply to the portion of a
nonqualified distribution paid from funds attributable to previously taxed components of qualified rollover contributions.
(53) If a rollover occurs within twelve months of a prior rollover for the same beneficiary, the rollover will be taxed to the beneficiary as a
nonqualified distribution.
If a distribution is made from a Roth IRA prior to this five-year period, it is a
nonqualified distribution. The ordering rules determining the taxability of nonqualified Roth IRA distributions include:
Thus, the Wilsons must treat $4,000 as a
nonqualified distribution. (Note: Taxpayers won't owe the 10% penalty if they lose the 529 tax break because of a conflict with the American Opportunity Tax Credit.)
The moral of the story: Do not take a
nonqualified distribution from any Roth account, particularly a Roth 401(k) account.
A taxpayer considering a
nonqualified distribution from a section 529 plan may want to research whether the state in which he or she maintains an account still has a penalty; if it does, perhaps the taxpayer can roll the account over to a state without a penalty before making a
nonqualified distribution.
To avoid a federal 10% surtax one must roll over the account into another state plan that has eliminated the penalty before taking the
nonqualified distribution.
If Scott takes a $30,000 withdrawal in 2009 to buy a boat, $24,000 will be tax-free as a return of his contributions and $6,000 will be taxable in his regular bracket and subject to a 10% penalty as a
nonqualified distribution.
A nonqualified withdrawal from a state with a penalty will subject the earnings portion of the
nonqualified distribution to penalties at the Federal and state levels.
In determining the taxable portion of a
nonqualified distribution, Regs.
* Ordering rules apply to
nonqualified distributions.
