Qualified Distribution

A qualified distribution is made from a Roth IRA and is tax and penalty free. The following two requirements must be met in order to be a qualified distribution:

1. The distribution must occur at least five years after the owner established and funded his/her first Roth IRA; and, 
2. At least one of the following:

• The Roth IRA holder must be at least age 59.5 when the distribution occurs.
• Distributed assets limited to $10,000 are used towards the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member.
• The distribution occurs after the Roth IRA holder becomes disabled.
• The assets are distributed to the beneficiary of the Roth IRA holder after his/her death.

Distributions that do not meet the above criteria are considered non-qualified and may be subject to income tax and early distribution penalties (usually 10%). Those that do meet the criteria are usually excluded from an individual’s gross income.

In addition to qualified distributions, additional rules pertaining to Roth IRAs include required minimum distributions, wherein the IRS requires account holders to begin taking annual distributions by age 70½ or retirement, whichever is later.

Direct and indirect rollovers are key aspects of Roth IRAs and other forms of retirement plans, along with qualified distributions. In a direct rollover, the retirement plan administrator pays the plan’s proceeds directly to another plan or to an IRA, such as a 401(k) plan. In an indirect rollover, a plan administrator transfers assets among plans by giving an employee a check to be deposited into their own personal account. With an indirect rollover, it is up to the employee to redeposit the funds into the new IRA within the allotted 60 day period to avoid penalty.

Most rollovers (direct or indirect) occur when people change jobs, but some occur when account holders simply want to switch to an IRA with better benefits or investment choices.

Another important note for contributors age 50 and older: The catch-up contribution is a type of retirement savings contribution that allows people over 50 to make additional contributions to their 401(k) and/or individual retirement accounts (IRAs). The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created catch-up contributions so that older individuals would be able to set aside enough savings for retirement.