What is an exemption that allows a taxpayer to avoid the 10% penalty on a non-qualified Roth IRA distribution?

A taxpayer can avoid the 10% penalty on a non-qualified distribution from a Roth IRA under specific circumstances, one of which includes using the funds for unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI). This exemption reflects the tax code's provisions that allow individuals to access their retirement savings in times of significant financial need, particularly for necessary medical care that goes beyond the reach of their insurance or other financial resources.

The rationale behind this exemption is to provide relief to taxpayers who may face financial hardship due to healthcare costs, ensuring they aren't unduly penalized for accessing their own retirement savings to cover essential expenses. In contrast, the other options do not qualify as acceptable reasons for avoiding the 10% penalty: investment in non-qualified stocks doesn't relate to distributions, luxury purchases are not considered necessary expenses linked to the exemption criteria, and proceeds from selling a home do not influence the distribution rules governing Roth IRAs.