What Is a Qualified Distribution From a Roth IRA?

When you set up a Roth Individual Retirement Arrangement (IRA) to save and invest for retirement, the tax benefits can be substantial. Roth IRAs do not provide an up-front tax deduction for contributions, but investment earnings within the account are not taxed. In addition, all earnings remain entirely tax free provided they meet Internal Revenue Service (IRS) criteria as qualified distributions when withdrawn. Failure to follow IRS guidelines can result in loss of the tax benefits as well as a penalty assessment.

Time Frame

In general, two conditions must be met for a withdrawal from a Roth IRA to be a qualified distribution. The owner of the IRA must be at least 59 1/2 years old. In addition, the account must be five calendar years old. This time includes the entire calendar year the account is opened, even if it's opened on December 31. A special rule requires that funds added to a Roth IRA as a result of a conversion from another IRA (a "rollover") must remain in the IRA for five years. These rules apply only to rollover funds and earnings. Contributions to a Roth IRA may be withdrawn at any time.

Penalties

Unqualified distributions from a Roth IRA are subject to a penalty tax of 10 percent of the amount improperly withdrawn. In addition, such withdrawn funds may lose their tax-exempt status. The IRS also advises care when rolling over funds from another IRA and in making investments. A "failed rollover" will be treated as an unqualified distribution. The same is true if an investment is made using the Roth IRA that is prohibited, such as buying collectibles (such as rare coins or antiques) or derivatives securities.

Exceptions

Early withdrawals from a Roth IRA are considered qualified distributions under certain conditions. A beneficiary who inherits a Roth IRA can take money out at any time without penalty. Up to $10,000 can be used for the purchase or rebuilding of a first home. Paying for some higher education expenses for the owner or an immediate family member (such as tuition) is also allowed.

Economic Hardship

If medical expenses that are not covered by insurance exceed 7.5 percent of the person's income in a year, money may be taken from the Roth IRA to pay them without penalty. This exception also applies if a person can no longer work due to a disability. If the owner of a Roth IRA is unemployed, funds may be used to pay the premiums on health insurance policies.

Ordering Rules

To decide whether funds derive from contributions, rollovers or earnings, the IRS has established "ordering rules." Withdrawals are considered contributed funds up to the point at which the total of all contributions is exceeded. Then, withdrawals are considered rollover funds until the total of those funds is also exceeded. Only at that point are withdrawals classified as earnings.