(13) If a lump-sum nonqualifying distribution consists of employer securities, the net unrealized income thereon is (1) not includible in income, (2) not included in the basis of the securities, and (3) capital gain when realized in a subsequent taxable transaction.
A nonqualifying distribution from a designated Roth account is treated much differently than one from a Roth IRA.
(16) Thus, if the nonqualifying distribution is made before the annuity starting date, the amount includible in gross income as an amount allocable to income and the amount not includible in gross income as an amount allocable to investment in the contract are determined under Sec.
1(g)(2)(A) to extend the application of the "kiddie tax" rules to dependent children under age 18 (up from age 14), without effective planning, there could be unexpected adverse tax effects on early withdrawals from a plan (i.e., nonqualifying distributions in excess of a base amount to dependent children under age 18 will be taxed at the parents' marginal tax rates (rather than the child's)).
Withdrawal penalties: Nonqualifying distributions are taxed at ordinary income tax rates.