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:

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.

To learn more, see Avoiding IRS Penalties On Your IRA Assets and Tax Treatment Of Roth IRA Distributions.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

  1. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
  2. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  3. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  4. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  5. Can a 401(k) be used for a house down payment?

    A 401(k) retirement plan can be tapped to raise a down payment for a house. You can either borrow money or make a withdrawal ... Read Full Answer >>
  6. How old do I have to be to make catch-up contributions?

    Most retirement plans such as 401(k), 403(b), individual retirement accounts (IRAs) and Roth IRAs allow for catch-up contributions ... Read Full Answer >>
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