A Qualified Distribution refers to a distribution (withdrawal) from an account that meets certain criteria so that it is not subject to early withdrawal penalties or, in some cases, taxation.
For a Roth IRA, a distribution is qualified if:
- The account has been open for at least five years. This five-year period begins on the first day of the tax year for which the contribution was made.
- The distribution is made for a specific reason, which includes:
- The account owner is at least 59½ years old.
- The distribution is taken due to disability of the Roth IRA owner.
- The distribution is taken by a beneficiary after the account owner’s death.
- The distribution (up to a $10,000 lifetime limit) is used to buy, build, or rebuild a first home.
If a distribution from a Roth IRA doesn’t meet these criteria, it’s considered a non-qualified distribution. Non-qualified distributions may be subject to taxes and/or penalties, depending on the nature and amount of the distribution.
For a Traditional IRA, generally, any distribution taken before age 59½ is subject to an additional 10% early withdrawal penalty unless it meets certain exceptions, like:
- Medical expenses exceeding a certain percentage of adjusted gross income.
- Health insurance premiums paid while unemployed.
- Higher education expenses.
- Purchase of a first home (up to a $10,000 lifetime limit).
- Death or disability of the IRA owner.
- Taking substantially equal periodic payments.
- And a few others.
However, it’s worth noting that even if a distribution from a Traditional IRA meets one of these exceptions to the early withdrawal penalty, it may still be subject to regular income taxes.
As with all tax-related matters, rules and guidelines can be complex. It’s always advisable to consult with a tax professional or financial advisor to understand specific circumstances and implications related to qualified distributions or any other IRA-related topics.