Final answer:
In a nonqualified distribution from a Roth IRA, funds are distributed in the following order: principal (contributions) first, conversions and rollovers second, and earnings last, with possible taxes and penalties on earnings.
Step-by-step explanation:
When a nonqualified distribution is received from a Roth IRA, the deemed order of the funds distributed is principal first, then earnings. The Internal Revenue Service (IRS) has specific ordering rules for Roth IRA distributions. Contributions to the Roth IRA are withdrawn tax-free and penalty-free first. After all contributions have been distributed, conversion and rollover amounts are withdrawn on a first-in, first-out basis. Lastly, earnings are withdrawn, which may be subject to taxes and penalties if the distribution is nonqualified and does not meet certain conditions for a qualified distribution.