Intuit Academy Tax Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

When a nonqualified distribution is made from a retirement account, it is generally taxed as ordinary income and may incur an additional penalty. Nonqualified distributions often refer to withdrawals made before reaching the age of 59½ (or before the account has been open for a certain number of years in the case of Roth IRAs) that do not meet any specific exemption criteria.

The taxation of such distributions typically means that the amount withdrawn is added to the individual’s taxable income for the year, potentially increasing their overall tax liability. On top of this tax, many retirement accounts impose a penalty — often a 10% additional tax — for early withdrawals. This discourages premature access to retirement funds, emphasizing the purpose of these accounts as long-term savings vehicles.

In contrast, tax-free withdrawals and their criteria, ordinary income tax calculations, and the nuances of applying distributions to future tax credits do not pertain to the nature of nonqualified distributions from retirement accounts.