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February 16, 2009

Qualified distribution- Roth IRA

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Definition

A distribution from a Roth IRA that satisfies certain requirements, resulting in the distribution being tax-free and penalty free. Distributions that are non-qualified may be subject to income tax on amounts attributable to earnings ; the non-qualified distribution may also be subject to the 10-percent excise tax (penalty) unless an exception applies. A qualified distribution from a Roth IRA is defined as one that meets the following requirements:

1. It occurs at least five years after the Roth IRA owner contributed to his/her first Roth IRA (for instance, if an IRA owner contributed to his/her Roth IRA for 2007, this five year period begins January 1,2007, providing the 2007 contribution is made by the deadline (generally April 15,2008)…and

2. Meets one of the following requirements

1. Occurs on or after the IRA owner reaches age 59 ½

2. Occurs as a result of the Roth IRA owner is disabled (within the meaning or Internal Revenue Code Section 72(m)

3. Is distributed to the beneficiaries of the Roth IRA owner as a result of the Roth IRA owner being deceased.

4. Is used towards the purchase of a first-time home for the IRA owner or an eligible family member (limited to $10,000 for the IRA owner’s lifetime).

Referring Cite

IRC §408A (d)(2), IRC §408A(d)(5), IRS Publication 590

Additional Helpful Information

  • If an individual maintains multiple Roth IRAs, the five-year-period for determining if a distribution is qualified starts with the first Roth IRA to which the individual made a contribution or conversion.
  • For nonqualified distributions, the ordering rules must be applied for determine if, and how much of, the distribution is subject to taxes and/or the 10% early distribution penalty.
  • The five year period for determining if a distribution is qualified is separate from the five-year period that is used to determine if a Roth-conversion amount is subject to the early distribution penalty. The five year-period that is used to determine if a Roth-conversion amount is subject to the early distribution penalty applies separately to each conversion amount. For instance, if someone converts $50,000 from a traditional IRA to a Roth IRA in 2008 and then converts $25,000 from a traditional IRA to a Roth IRA in 2009, the five year period for determining if the $50,000 is subject to the early distribution penalty starts in 2008, and it starts in 2009 for the $25,000.
  • If an individual is eligible for a qualified distribution, he need not keep track of the five-year period for each conversion because that five-year period becomes moot as all distributions from any of his Roth IRAs will be tax and penalty free.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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