Updated on January 13, 2023:

  • Under the new Secure Act 2.0 provisions, the minimum age for required minimum distributions was changed from 72 to 73 starting in 2023.
  • This page has been updated with the new provisions.

Withdrawals from a retirement plan can either be classified as qualified or non-qualified. A qualified distribution is when you make a withdrawal after meeting all of the IRS criteria for a distribution. A non-qualified distribution is when you make a withdrawal without meeting the IRS criteria. There’s also a required minimum distribution (RMD), which requires you to start taking distributions once you reach a certain age.

What counts as a qualified distribution?

A qualified distribution is when you make a withdrawal from a retirement plan after meeting the IRS criteria for taking a distribution. Qualified distributions have no penalties, but taxes may be applied if you’re withdrawing from a pre-tax retirement plan. Roth retirement plans have no taxes due on withdrawals because income taxes were already paid when you contributed.

For most retirement plans, you can start to take distributions without any penalties when you reach the age of 59½.

Pre-tax vs Roth retirement account

When you’re withdrawing from pre-tax retirement accounts, your distribution is classified as qualified as long as you’re at least 59½ years old.

Examples of pre-tax retirement accounts:

Roth retirement accounts have one additional rule in order for a distribution to be qualified: The 5 year rule. A Roth retirement account must be at least 5 years old (at least 5 years must have passed since your first contribution) in order to classified as a qualified distribution.

Examples of Roth retirement accounts:

Also read: Pre-tax vs Roth Contribution Differences

What is determined a non-qualified distribution?

For pre-tax retirement accounts, any withdrawals made before the age of 59½ are considered as non-qualified distributions. In this case, a 10% penalty is applied on top of regular incomes taxes on the amount withdrawn.

For example, if you’re taking a distribution of $10,000, you’ll owe $1,000 in penalties plus income taxes applied to the $10,000. The tax amount is determined by your tax bracket and tax rates at the time of withdrawal.

For Roth retirement accounts, any withdrawals made before the age of 59½ AND before your account is at least 5 years old, are considered non-qualified distributions. The same penalties apply: You will be hit with a 10% penalty plus income taxes on the amount drawn.

What is a required minimum distribution (RMD)?

A required minimum distribution (also referred to as an RMD) is a mandatory distribution set by the IRS. All retirement plans, except the Roth IRA have an RMD rule. Once you reach the age of 73 years old, you must start taking distributions from your account each year until your account is emptied.

How much do I need to withdraw?

RMD amounts are calculated by taking your account balance from December 31, the previous year, and dividing it by your 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 steep penalty of 50% of the amount you were supposed to withdraw.

You can calculate your RMD amount using the RMD table.

Other options to withdraw from a retirement plan

401k or solo 401k loan

Another alternative to taking a distribution from your retirement plan is to take a loan. A 401k and solo 401k offer the ability to take a loan from your account balance.

You’re allowed to withdraw up to 50% of your account value up to a maximum of $50,000. You’ll have 5 years to repay the loan, or if you’re using the money to pay for a principle residence, you may get up to 15 years to pay it back.

Interest rates are prime rate plus one or two percent, and you’re allowed to use the money however you like.

The advantage of a 401k loan is that, since you’re technically borrowing from your own account, there are no credit checks or long approval applications. You can get access to the funds faster than if you were to try to get a loan from other financial institutions, and late payments do not affect your credit score.

The disadvantage of a 401k loan is that you’re depleting your retirement account of funds that would otherwise be invested and earning you compound interest.

Indirect rollover

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

In a direct rollover, you never touch the money. The funds are sent directly from your old plan provider to your new plan provider. There are usually no fees or taxes associated with direct rollovers.

In an indirect rollover, your old plan provider will send you the money first rather than sending it directly to the new plan provider. You then have 60 days to deposit the money in full to your new plan provider.

This is often called a 60-day rollover, since you’re technically allowed to use the money however you like during the 60 day period as long as it’s deposited in full to your new account. Essentially, it’s a short-term loan solution with no fees or taxes as long as you deposit the money.

The downside of a 60-day rollover is that you’re at risk of taxes and fees if you fail to deposit the money in full before the deadline. If you miss the deadline, the rollover would be treated as a non-qualifed distribution, and you’ll have to pay a 10% penalty plus income taxes.