A Roth IRA allows you to put money away for retirement, with the government offering you tax advantages along the way. However, there are rules about taking money out. You can't just decide at age 45 that you want to open a surf shop at Teahupo'o, clean out your Roth IRA, and use the money to purchase your inventory of wax and sunglasses. If you take money out early, you face a penalty.
A qualified distribution is a withdrawal from a Roth IRA that follows all the rules. You get the money without added taxes and without a penalty.
There are two basic forms of IRA (individual retirement account). One is the traditional IRA. In this version, you contribute pre-tax dollars...meaning you get a tax break on any cash you put into it. The money you put into the account (hopefully) grows over time. When you get to retirement age, you start taking the money out. At that point, your withdrawals get taxed as ordinary income.
The other version is the Roth IRA. In this version, you contribute after-tax dollars. You pay your taxes on the money when you earn it, then put the money into the Roth IRA. No tax breaks at that point. Then the money bakes for a few decades in the Roth IRA, (hopefully) growing over time. Now, it's retirement time. You start taking the money out. For the Roth IRA, you don't pay taxes on the money you take out.
So for the traditional IRA, the tax break comes at the time of contribution. For Roth IRA, the tax break comes at the time of withdrawal. The IRS gets out the microscope for those Roth IRA withdrawals. The tax people want to make sure you follow all the rules when taking your money out, since you're going to get the cash without paying any taxes on it. That's what makes the distribution qualified. It fits all the rules. It qualifies for that favorable tax treatment.
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Finance: What is Capital Gains Distribut...20 Views
Finance a la shmoop what are capital gains distributions? cap gains app
hap-happy day.. your mutual fund invested a hundred grand in whatever.com it then [Mutual fund appears]
was bought by Google for three hundred grand
three years after you invested at least that was your portion that three hundred
grand well you had a gain of two hundred grand
on your investment and because Google paid cash not stock in acquiring
whatever.com on your books the gain was realized ie turned into cash so then the
mutual fund has to distribute to you that capital gains ie the cash it [Capital gains definition appears]
realized in selling the company to the kindly loving people at Google whose
motto is do only a little bit of evil right so one more time for the people in
the back how does this capital gains distribution thing work well the fund
manager looking out for your mutual fund may sell or buy some of the stocks or [Fund manager appears with stocks and bonds]
bonds in your fund if she sells and makes a profit well then that profit or
the proportionate gains part of it has to be distributed to the fund holder and
that's you and then of course you got to pay taxes
on that distribution if your fund is held in a normal account like it's in a
401k or an IRA you'll pay taxes on it later but not right away and if you own
it personally well you'll pay at that year yeah Uncle Sam always needs to get [Uncle Sam appears]
his cut when there's capital gains distribution if he doesn't he gets angry
and you know you wouldn't like Uncle Sam when he's angry [Uncle Sam turns into Hulk]
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What are IRA distributions, and how do they work? Individual Retirement Accounts are tax deferred and taxed as ordinary income on qualified distrib...