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Qualified Distribution

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:

  1. 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.
  2. 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.