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What is a Qualified Distribution?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 May 2017
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    2003-2017
    Conjecture Corporation
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Qualified distributions are disbursements from a Roth Individual Retirement Account that carry no type of penalty or tax burden. This type of distribution strategy only applies to the Roth IRA, a type of individual saving account that is available in the United States. In order to manage this type of qualified distribution activity from a Roth IRA, specific requirements must be met. Should the disbursement not fully comply with the criteria required by the country’s Internal Revenue Service, the transaction is considered non-qualified, and is subject to taxation and penalties for early distribution from the savings plan.

The first requirement associated with a qualified distribution is that the disbursement cannot take place unless the owner of the Roth Individual Retirement Account established and deposited funds into his or her first Roth IRA at least five calendar years before the date of the proposed disbursement. Depending on the exact structure of the account, there may also be a required minimum distribution associated with the disbursement. This restriction helps to discourage frequent withdrawals from the account during those first few years, and actually aids the account holder in growing a nest egg for the retirement years.

Along with the five year duration required to avoid taxes and withdrawal penalties, a qualified distribution will also involve complying with at least one other of several criteria. For example, the holder of the account must be at least fifty-nine and one-half years of age at the time of the withdrawal in order to enjoy the tax break and absence of penalties for early withdrawal. If the withdrawal is intended for use as the means of purchasing or rebuilding a first home for the account holder, no taxes are incurred, and no withdrawal penalties are assessed. The amount of the withdrawal is limited to a specific amount that is revised from time to time.

Other criteria related to the qualified distribution has to do with changes in the health of the individual who established and maintained the account for at least five consecutive years. Should the Roth IRA holder become disabled, funds can be disbursed to aid in his or her care without any type of penalty or tax burden. In the event that the account holder dies, the beneficiary may receive a distribution from the account without the assessment of penalties or taxes. In order to qualify the distribution, documented proof of the disabled status or the death of the account holder is usually required before the disbursement can be identified as a qualified distribution.

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