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Question: 1 / 145

What is a nonqualified distribution from a retirement account?

A tax-free withdrawal for retirement expenses

A withdrawal that incurs taxes and penalties

A nonqualified distribution from a retirement account refers to a withdrawal that does not conform to the rules governing penalty-free distributions. Typically, these rules are set by the Internal Revenue Service (IRS) for retirement accounts such as 401(k)s and IRAs.

When an individual makes a nonqualified distribution before reaching the age of 59½ or without meeting specific requirements, they may be subject to income taxes on the withdrawn amount, as well as potential early withdrawal penalties. This approach to taxation underscores the purpose of retirement accounts, which is to encourage long-term saving for retirement by imposing penalties on early access to funds.

The other options do not accurately describe a nonqualified distribution. Tax-free withdrawals for retirement expenses suggest that the funds are accessed under the appropriate conditions without penalties, which contradicts the nature of a nonqualified distribution. Moreover, a distribution that meets retirement criteria, as stated in another option, would be classified as qualified and not subject to extra taxation. Lastly, an investment in qualifying stocks does not relate to the concept of distributions from retirement accounts at all. Thus, the definition of a nonqualified distribution is primarily illustrated by the scenario involving taxes and penalties.

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A distribution meeting retirement criteria

An investment in qualifying stocks

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