Understanding Non-Qualified Roth IRA Distributions (2024)

Qualified vs. Non-Qualified Roth IRA Distributions: An Overview

When it comes to Roth IRA withdrawals, timing is everything. You can withdraw your Roth IRA contributions at any time and owe no taxes or penalties. When you turn 59½ (and your Roth is at least five years old), your withdrawals of both contributions and earnings will count as qualified distributions, freeing them of taxes and penalties.

However, there can be consequences if you withdraw earnings that don't count as qualified distributions. You'll owe taxes and an early withdrawal penalty on any non-qualified funds you withdraw.

Qualified Roth IRA Distributions

A qualified distribution from your Roth IRA allows you to avoid taxes and the 10% early withdrawal penalty. To count as qualified, the distribution of earnings from a Roth IRA must meet both of these requirements:

1. It occurs at least five years after you opened and funded your first Roth IRA (even if you're withdrawing from a different Roth IRA account).
2. You take the distribution under one of these circ*mstances:

• You are at least 59½ years old
• You have a disability
• The payment is made to your beneficiary or to your estate after your death
• A withdrawal of up to $10,000 finances the buying, building, or rebuilding of a first-time homebuyer's home
• A withdrawal of up to $5,000 in support of the birth of a new child or adoption

You can qualify as a first-time homebuyer even if you've owned a home in the past. According to the Internal Revenue Service (IRS), you're a first-time homebuyer if "you had no present interest in a main home during the two-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."

You can also use the money from your Roth IRA to help out a child, grandchild, or parent who meets the first-time homebuyer definition. No matter who is using the amount, you can withdraw a lifetime maximum of $10,000 under the first-time homebuyer exception.

Non-Qualified Roth IRA Distributions

Withdrawals that don't fit the criteria above are generally classified as non-qualified Roth IRA distributions. Non-qualified distributions are subject to taxes, plus an additional 10% penalty. You may be able to avoid the 10% penalty if one of these exceptions applies:

• The distributions are part of a series of substantially equal periodic payments (SEPPS).
• You have unreimbursed medical expenses exceeding 10% of your adjusted gross income (AGI).
• You're paying medical insurance premiums after losing your job.
• The distributions are not more than your qualified higher education expenses (for you or eligible family members).

In addition, you may be able to avoid the 10% penalty if the distribution is:

• Due to an IRS levy of the qualified plan
• A qualified reservist distribution
• A qualified disaster recovery assistance distribution

All other withdrawals from a Roth IRA that do not meet these criteria are considered non-qualified distributions. You'll owe taxes and an early withdrawal penalty on any non-qualified funds you withdraw.

Ordering Rules for Roth IRA Withdrawals

The IRS treats withdrawals from a Roth IRA in a specific order. When you withdraw money from any of your Roth IRAs (if you have several accounts), the distributions are ordered as follows:

1. Regular contributions
2. Conversions and rollover contributions on a first-in, first-out basis
3. Earnings on contributions

Don't forget that you can withdraw your contributions at any time, for any reason, without owing taxes or a penalty. But after you've withdrawn the total amount of your contributions, your next withdrawals will come from your conversions and rollovers, and finally, your earnings. Those withdrawals, unless they're qualified, can trigger taxes and penalties.