What are Qualified Distributions?

• Qualified distributions from IRAs do not incur any penalties when the money is withdrawn. For traditional IRAs, qualified distributions refer to money taken out after you have reached the age of 59 1/2. Roth IRAs also require that you be at least 59 1/2 years old, but they add an additional qualification that your first Roth IRA contribution must have been at least five tax years ago.
  
  

Drawing Money Early

• If you draw from your IRA before you meet the criteria for a qualified distribution, you must pay a 10 percent early withdrawal penalty on the taxable portion. Early withdrawals from traditional IRAs are fully taxable, unless you have made nondeductible contributions. If so, the portion that comes from your nondeductible contribution is nontaxable and, therefore, not subject to the early withdrawal penalty. For Roth IRA early withdrawals, you can remove your contributions tax-free at any time. However, if you have removed all the contributions, you must pay taxes and an early withdrawal penalty on your earnings from those contributions.
  
  

Special Circumstances

• In certain circumstances, the IRS does not impose the 10 percent early withdrawal penalty. No early withdrawal penalty is used in the event of a permanent disability, medical expenses above 7.5 percent of your adjusted gross income, post-secondary schooling or up to $10,000 used for the purchase of a first home. In the case of a permanent disability or the first-time home buyer exception for Roth IRAs, if the account has been open for at least five tax years, the income taxes are waived as well.
  
  

Tax Treatment of Qualified Withdrawals

• Qualified withdrawals from traditional IRAs must be included in your taxable income for the year. For example, if you take a qualified withdrawal of $10,000 from your traditional IRA, you must report an additional $10,000 on your federal income taxes. Qualified withdrawals from your Roth IRA do not count as taxable income. However, the IRS requires you to report the amount as a nontaxable IRA distribution.