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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* Ordering rules apply to nonqualified distributions.
There is a 20% penalty on nonqualified distributions from a health savings account (HSA) before age 65.
The taxable portion of nonqualified distributions from your Roth IRAs is subject to the same 10 percent penalty rules that apply to traditional IRAs.
Beginning in 2011, nonqualified distributions from HSAs and Archer MSAs will be subject to an excise tax of 20% (increased from 10% for HSAs and 15% for Archer MSAs).
1, the excise tax for nonqualified distributions from Health Savings Accounts will go from 10 percent to 20 percent.
In addition, Roth IRA contributions can be withdrawn tax free at any time; nonqualified distributions are treated as made from contributions first.
New information includes new regulations governing required minimum distributions; catch-up contribution provisions for taxpayers age 50 or over; deemed IRAs under qualified retirement plans; expanded rollover options; estate tax rules and planning for large IRAs; new proposed rules regarding the valuation of life insurance contracts; treatment of nonqualified distributions from Roth IRAs; taxes and penalties that may apply to a Coverdell ESA; and instructions for completing Forms 5498, 1099-R, and 1099-Q.
Nonqualified distributions are includible in income to the extent attributable to earnings (remember, you have basis in your contributions) and are subject to the 10 percent penalty tax applicable to early withdrawals, unless an exception applies.
The plan administrator or other responsible party must track deferrals to the plan (the after-tax amounts), earnings in the plan (the pre-tax amounts), and distributions (nonqualified distributions are pro rata distributions, so both pre-tax and after-tax balances are affected by a distribution and the beginning of the five-year holding period.
Note: this treatment differs from the taxation of nonqualified distributions from Roth IRAs, in which nonqualified distributions are treated as a return of contributions (and thus not includible in gross income) until all contributions have been returned as basis.
The earnings on nonqualified distributions are subject to income tax and a 10 percent penalty.