Non-Qualified Roth IRA Distribution

What Is a Non-Qualified Roth IRA Distribution?

A non-qualified Roth individual retirement account (Roth IRA) distribution is a withdrawal that doesn’t meet Internal Revenue Service (IRS) criteria for a qualified distribution. If you take a non-qualified distribution, you could end up owing taxes on the amount withdrawn as well as an early withdrawal penalty.

Key Takeaways

  • Non-qualified Roth individual retirement account (Roth IRA) distributions are subject to taxes and potentially an early withdrawal penalty.
  • Qualified Roth IRA distributions must meet certain criteria, such as the account owner must be at least 59½ years old and the account at least five years old.
  • You can withdraw contributions, but not earnings, from a Roth IRA at any time for any reason without paying taxes or a penalty.

Understanding Non-Qualified Roth IRA Distributions

Distribution rules for Roth IRAs differ depending on whether you withdraw contributions or earnings. Roth IRAs are funded with after-tax dollars, which means that you don’t get an up-front tax break like you would with a traditional IRA. But the money that you withdraw is tax free in retirement, as long as you meet a couple of conditions.

Because you’ve already paid income taxes on the money that you’ve contributed to the account, you can withdraw contributions from a Roth IRA at any time without being subject to taxes or penalties. The rules are different for earnings. A withdrawal of earnings that doesn’t fit the following criteria is generally classified as non-qualified Roth IRA distributions:

  • It occurs at least five years after you opened and funded your Roth IRA.
  • One of the following is also true:
  1. You are at least 59½ years old.
  2. You have a disability.
  3. The payment is made to your beneficiary or to your estate after your death.
  4. A withdrawal of up to $10,000 to finance a first-time homebuyer’s home.
  5. A withdrawal of up to $5,000 in support of the birth of a new child or adoption.

Non-qualified Roth IRA distributions are taxed as ordinary income. In addition, you’ll have to pay a 10% early withdrawal penalty if you are younger than 59½.

Taking a non-qualified distribution from your Roth IRA not only results in taxes and fees but also means that you’ll have less money to rely on after you retire. In addition, you’ll potentially lose out on years of compounding.

Special Considerations

While non-qualified distributions are subject to income taxes, you may be exempt from the 10% penalty if one of the following exceptions applies:

Do you pay taxes on Roth individual retirement account (Roth IRA) distributions?

Qualified distributions from a Roth individual retirement account (Roth IRA) are tax free. You pay tax on non-qualified distributions and/or an early withdrawal penalty unless you’re eligible for an exception under Internal Revenue Service (IRS) rules.

How much is the early withdrawal penalty for a Roth IRA?

The early withdrawal penalty for a Roth IRA (and a traditional IRA) is 10% of the amount that you withdraw. You also may owe income tax in addition to the penalty. You can withdraw contributions (but not earnings) at any time from a Roth IRA without being subject to tax and the penalty.

How are non-qualified Roth IRA distributions taxed?

Non-qualified Roth IRA distributions are taxed as ordinary income. You also will be subject to a 10% early withdrawal penalty if you are younger than 59½ or the account is less than five years old, or both. Depending on your tax bracket, this can add up to a considerable sum.

What is the five-year rule?

Earnings that you withdraw from a Roth IRA aren’t taxed as long as you meet the rules for qualified distributions. For a distribution to count as qualified, you will need to have had the Roth IRA for at least five years, which is known as the five-year rule, and either be at least 59½ years old or fit some other special conditions. Because contributions are made with after-tax funds, you can withdraw them at any time.

Article Sources

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  1. Internal Revenue Service. "Traditional and Roth IRAs."

  2. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

  3. Internal Revenue Service. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs).”

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