There are two basic types of distributions you can take from your Roth IRA: qualified and non-qualified. The basic difference is this: qualified distributions generally take place after the owner is 59.5, or when they have a permanent disability or pass away. Non-qualified distributions are those that happen at any other time. Additionally, a Roth IRA must have been opened for at least five years for distributions to be qualified. Roth IRAs also aren’t subject to RMDs the way traditional IRAs are. That allows you to grow your money without triggering a tax penalty. If you want help with Roth IRA distributions, consider working with a financial advisor.
What Are Qualified Roth IRA Distributions?
Qualified distributions from a Roth IRA those that happen when a person is over 59.5 years old and meets certain qualifications. The IRS spells out the rules for Roth IRA qualified distributions. Generally, a distribution or withdrawal is qualified if it occurs at age 59.5 or later. It’s also qualified if the IRA’s owner becomes permanently and completely disabled or if they pass away. A distribution also is qualified when taken as a series of equal periodic payments. A Roth IRA qualified distribution includes a withdrawal of up to $10,000 if the withdrawal is for the purchase of a first home.
However, a Roth IRA must be open for at least five years for any of the above distributions to count as qualified. The clock starts ticking on the first day of the first year you made a contribution to your Roth IRA.
The upside of a Roth IRA qualified distribution is that it isn’t part of your gross income. That means you won’t owe taxes or penalties on the withdrawal. That’s a significant difference from traditional IRAs, for which distributions are always taxable at your ordinary income tax rate.
What Are Non-Qualified Roth IRA Distributions?
A non-qualified distribution from an Roth IRA is any distribution that doesn’t follow the guidelines for Roth IRA qualified distributions. Specifically, that means distribution:
- Taken before age 59.5.
- That don’t meet the five-year requirement.
- That don’t qualify for an exception.
Non-qualified distributions from a Roth IRA are generally subject to ordinary income tax on earnings as well as a 10% early withdrawal penalty. Exceptions help avoid that penalty.
The list of exceptions the IRS allows includes:
- Distributions used to buy, build, or rebuild a first home.
- Distributions that are part of a series of substantially equal periodic payments.
- Withdrawals made to cover unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
- Withdrawals covering health insurance premiums during unemployment.
- Distributions made to pay qualified higher education expenses.
- A distribution that’s the result of an IRS levy of your Roth account.
- Qualified reservist distributions.
Qualified and non-qualified distribution rules attempt to encourage savers to preserve their retirement accounts just for retirement. These exceptions, however, make it possible to access your savings penalty-free if you have certain financial needs you can’t cover with other savings or assets. Ordinary income tax would still apply to any earnings withdrawn through a non-qualified distribution.
It’s important to note that the five-year rule extends beyond age 59.5. If you’re that age or older and take withdrawals from a Roth IRA that’s less than five years old, those would be non-qualified distributions. You’d pay taxes on withdrawals of your earnings but not the 10% early withdrawal penalty.
Tax-Free Roth IRA Withdrawals
The rules for distributions apply solely to withdrawals of earnings on your Roth IRA investments. The IRS includes a provision that allows savers to withdraw any of their original contributions tax- and penalty-free at any time. There’s no limit on the amount of contributions you can withdraw.
However, not everyone can make a contribution to a Roth IRA. Your tax filing status and adjusted gross income (AGI) determines whether or not you can contribute. For 2023, single filers, married couples filing separately who don’t live together, and heads of household can make a full contribution if their modified adjusted gross income (MAGI) is less than $138,000. The MAGI limit for married couples filing jointly and qualifying widows and widowers is less than $218,000. You won’t be able to contribute at all if your MAGI is greater than $153,000 and $228,000, respectively.
Also, keep in mind that Roth IRA contributions are not tax-deductible. That varies from traditional IRAs, which allow you to deduct contributions based on your income and filing status.
When Should You Take Your Roth IRA Distributions?
Ideally, you shouldn’t need to tap into your Roth IRA until you retire. A Roth IRA qualified distribution, for example, could create tax-free income. That income might to supplement Social Security benefits, taxable 401(k) withdrawals, or annuity payments.
But you may experience a financial hardship or emergency that requires a withdrawal from your Roth IRA. In that scenario, you’d want to weigh the tax implications carefully. You then must determine whether it is subject to ordinary income tax and the 10% early withdrawal penalty.
It may be helpful to talk to a tax professional about the implications of taking a non-qualified distribution from a Roth IRA. If you take an early distribution that’s subject to taxes and penalties, they can also help you file Form 5329 to report those distributions.
Ideally, if you have a Roth IRA, you’re able to let that money grow untouched for as long as possible. A Roth IRA works best when you reap tax-free growth from long-term investments.
That doesn’t mean you won’t need to withdraw money early. If that’s the case, knowing the difference between qualified and non-qualified distributions can help you minimize any tax consequences.
Roth IRA Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s asset allocation calculator to see how you should invest your money in your Roth IRA.
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