Understanding Qualified Distributions

A Roth IRA can expand your financial opportunities in retirement by giving you the potential to collect tax free distributions, whether opening a new account or converting an IRA. The contributions that you make to a Roth IRA and the earnings from these funds may be withdrawn without taxes or penalties, as long as you meet the requirements established by the IRS. In certain cases, you may be eligible for tax free distributions before retirement. To understand how distribution requirements affect your personal retirement planning goals, consult your tax advisor or an investment consultant.

Qualifying Conditions

In order to qualify for a tax free Roth IRA distribution, you must be at least 59 1/2 years old. At least 5 years must have passed since the first year that you made a contribution to the account. If you meet these eligibility requirements, you may withdraw distributions from your Roth IRA without taxes or penalties. Because there are no minimum distributions with a Roth IRA, you may also choose to continue making contributions to your account for as long as you like. You can also choose to leave a Roth IRA to your beneficiaries as part of their inheritance.

Retirees aren't the only ones who can benefit from the tax advantages of a Roth IRA. Whether you are buying, building or rebuilding a first home, you can withdraw up to $10,000 without penalties for the purchase of the property. In order to qualify as a first time homebuyer, you can not have held financial interest in a primary residence for the past two years. This means that you can actually use this benefit more than once, but your total withdrawals may not exceed $10,000 for the first time homebuyer's option. [1]

The home that you buy with funds from a Roth IRA must be your main residence. The home may also be the main residence of your spouse, child, parent or grandparent. You may also qualify for an early distribution if you become disabled, have excessive unreimbursed medical expenses, are paying for medical insurance after becoming unemployed. [1]

If you are the beneficiary of an inherited Roth IRA, you are not required to pay taxes on your distributions. If you inherit a Roth IRA from your spouse, you may continue to make contributions to the account. If you are a non-spouse beneficiary, you must take distributions either by the end of the 5-year period after the death of the original owner, or have distributions paid out throughout your lifetime. A non spouse is not charged tax on distributions from an inherited Roth IRA if the 5 year waiting period has been met.

5 Year Waiting Period

The money you contribute to a Roth IRA is taken from your income after taxes, so these funds have already been subject to income tax. You may withdraw from your original contributions at any time. However, if you withdraw money from the earnings on your contributions before the account has aged for 5 tax years, you may be subject to taxes and penalties. These taxes may apply even if you have reached the retirement age of 59 1/2.

The 5 year waiting period for qualified distributions begins in the first year for which a contribution was made. The IRS allows you to make a contribution to a retirement account for the previous year, as long as you make the contribution before the filing deadline. If you make your first contribution in the current calendar year for last year, for instance, the 5 year waiting period will begin last year. Understanding qualified distributions will help you make the most of your Roth IRA with minimal penalties.

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