Non-Qualified Distribution

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Non-Qualified Distribution

A distribution from an IRA, 401(k), education savings plan, or similar vehicle that is subject to income tax when it otherwise would not be. Generally speaking, a distribution is non-qualified when one makes it before a certain age (for a retirement plan) or in excess of a certain amount (for an education plan). Non-qualified distributions may also be subject to excise taxes.
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Once an investor turns 65, however, non-qualified distributions are taxed penalty-free, just like 401(k) distributions.
Instead of following ordering rules, non-qualified distributions from designated Roth accounts generally consist of a pro-rata portion of after-tax funds (i.e., DRA salary deferrals and in-plan Roth conversion amounts) and pre-tax funds (earnings).
Non-qualified distributions of any amount attributable to the qualified rollover are considered an investment in the contract, or recovery of basis, and not subject to early withdrawal penalties.
These non-qualified distributions from Roth IRAs are treated as made first from contributions other than rollover contributions, then from qualified rollover contributions and finally, from any earnings on the contributions.
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