Retirement Plan Distributions: Qualified vs Non-Qualified vs RMD

When you withdraw money from a retirement plan, the IRS classifies it into three categories: qualified distributions, non-qualified distributions, and required minimum distributions (RMDs). Understanding these distinctions is key to avoiding penalties and managing your retirement savings wisely.

Understanding withdrawal options may help you make informed decisions about your retirement planning. Let’s break down each type of distribution so you can plan wisely.

What Counts as a Qualified Distribution?

A qualified distribution is a withdrawal from a retirement plan that meets all IRS requirements. These withdrawals typically avoid early withdrawal penalties, but taxes may still apply depending on the type of account.

✅ Pre-tax retirement accounts – Withdrawals are taxed as ordinary income since contributions were made before taxes.

✅ Roth retirement accounts – Withdrawals are tax-free, since you already paid taxes on your contributions—as long as you meet certain conditions.

For most retirement plans, age 59½ is the generally then magic number when you may be able to  start taking withdrawals without penalties once you reach this age.

Pre-tax vs Roth Retirement Account

Not all retirement accounts follow the same tax rules, so whether a distribution is qualified depends on the type of account you’re withdrawing from. Pre-tax accounts are typically taxed when you withdraw, while Roth accounts offer tax-free withdrawals — but only if you meet certain conditions which could vary based on your specific situation. 

Here’s how each one works:

✅ Pre-Tax Retirement Accounts: A distribution is typically considered qualified if you’re at least 59½ years old.

✏️ Examples of Pre-tax retirement accounts:

✅ Roth Retirement Accounts: Must follow the 5 year rule to qualify. This means your Roth retirement account must be at least 5 years old since your first contribution. If you withdraw early, earnings may be taxed and penalized, even if you’re over 59½.

✏️ Examples of Roth retirement accounts:

📌 Also read: Pre-tax vs Roth Contribution Differences

Disclosure: This information is general in nature and not intended as tax advice. Consult with a qualified tax professional regarding your specific situation.

What is a Non-Qualified Distribution?

A non-qualified distribution happens when you withdraw money from a retirement account before meeting IRS rules. These withdrawals trigger penalties and taxes, reducing the amount you get to keep.

Pre-Tax Retirement Accounts

❌ If you withdraw before age 59½, it’s generally considered non-qualified, meaning you may owe:

✏️ Example: If you withdraw $10,000 early, you’ll owe $1,000 in penalties, plus income taxes on the entire $10,000.

Roth Retirement Accounts

❌ If you withdraw before age 59½ and before your account is at least 5 years old, it’s non-qualified, and you’ll potentially face:

The 5-year rule is key — even if you’re over 59½, your Roth account must be at least 5 years old to make a tax-free withdrawal.

What Is a Required Minimum Distribution (RMD)?

A required minimum distribution (RMD) is a mandatory withdrawal the IRS requires from most retirement accounts once you reach age 73. The rule generally applies to all retirement plans except Roth IRAs. Once RMDs begin, you are typically required to  take a set amount each year until your account is fully withdrawn.

How Much Do I Need to Withdraw?

RMD amounts are calculated by taking your account balance from December 31 of the previous year and dividing it by your IRS life expectancy factor.

The RMD amount rises each year as you get older. If you do not take your RMD, you’ll have to pay a penalty of 25% (reduced to 10% if corrected within 2 years) of the amount you were supposed to withdraw.

📌 You can calculate your RMD amount using the RMD table.

Other Ways to Access Retirement Funds

401k or Solo 401k loan

Instead of withdrawing money permanently, a 401k loan may let you borrow against your retirement savings. Both 401k and Solo 401k plans can allow this option so long as it’s offered in your plan documents.

How it works:

Advantages of a 401k Loan:

✅ No credit check or loan approval process—you’re borrowing from yourself.

✅ Faster access to funds compared to a bank loan.

✅ Late payments don’t impact your credit score.

Disadvantages of a 401k Loan:

❌ If you leave your employer while having an outstanding 401(k) loan, the entire balance may become due within a short timeframe, potentially resulting in taxes and penalties if not repaid.

Disclosure: Not all plans offer loan options. Plan rules vary, and administrative fees may apply.

Direct vs Indirect Rollover

Rollovers allow you to transfer funds from one retirement account to another. There are two types of rollovers that you could choose: direct and indirect.

✅ Direct Rollover – A safer option. Your old plan provider sends the funds directly to your new plan provider. No taxes, no penalties, low hassle.

✅ Indirect Rollover – Your old provider sends the money to you first instead of directly to your new account. You then have 60 days to deposit the full amount into your new plan. This is often called a 60-day rollover since you can technically use the money like a short-term, interest-free loan, as long as you redeposit the full amount within 60 days.

Risks of an indirect rollover:

❌ If you miss the deadline, the IRS treats it as a non-qualified distribution. This means:

❌ Your plan administrator may be required to withhold 20% of the distribution for tax purposes, meaning you would need to make up that 20% from other sources to complete a full rollover.

In Summary

Know the rules before withdrawing from your retirement plan to avoid penalties and taxes. If you need funds, explore options like a 401k loan or 60-day rollover first. Plan wisely to protect your savings and maximize your future retirement income.