The ordering rules must be applied to determine whether the distribution is subject to income taxes and/or the early distribution penalty. Under these ordering rules, distributions are taken from funding sources in the following order:
- Regular contributions
- Roth conversions
Note: Roth conversion amounts are not considered distributed until all contribution amounts have been distributed; earnings are not considered distributed until all contribution - and then all conversion - amounts have been distributed
If your distribution consists of only contributions, the amount is tax and penalty free.
If your distribution includes amounts attributed to conversion amounts, that amount will be subject to the early distribution penalty, unless an exception applies.
If your distribution includes amounts attributed to earnings, that amount will be subject to income tax and the early distribution penalty. The penalty is waived if an exception applies.
Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA