IRA distribution to pay medical expense

[cred65]

TP receives $24K to pay medical expense of similar amount. The 1099 R has Box 7 Distribution Code of 01 normal distribution.

Is this going to cause a problem with feds?

[TAXBILLY]

To what problem are you referring?

taxbilly

PS

1 is premature distribution; 7 is normal distribution.

[joans]

There is a spot when it figures the penalty to waive it because of medical expenses. Not sure what the code is, but I think it is line 2 of Additional Taxes Form for cashing an IRA early.

[cred65]

There is a spot when it figures the penalty to waive it because of medical expenses. Not sure what the code is, but I think it is line 2 of Additional Taxes Form for cashing an IRA early.

Code 05 on form 5329 is for the medical exception. My question would be is this sufficent action or should TP have the issuer of the 1099 R correct the Distribution Code.

[joans]

I have used in on several returns and never had an issue with it. I have actually used it on mine, although that was for 1st time home buyer credit. As long as they show the medical expenses on their Schedule A and have the receipts to back it up that woud be sufficient.

[MDCPA]

Code 05 on form 5329 is for the medical exception. My question would be is this sufficent action or should TP have the issuer of the 1099 R correct the Distribution Code.

You have outlined the correct procedure - tax preparer completes form 5329 - uses code 05 - no penalty. Issuer of 1099R has used the correct distribution code assuming your client is under 59 1/2.

[TAXBILLY]

Not all of the amount escapes the penalty:

See page 3

http://www.irs.gov/pub/irs-pdf/i5329.pdf

taxbilly

[kcjenkins]

Code 05 on form 5329 is for the medical exception. My question would be is this sufficent action or should TP have the issuer of the 1099 R correct the Distribution Code.

The distribution code is correct. It is on the 5329 that you enter any exceptions that apply. The issuer does not know what exceptions may apply, nor the amount of any such exception.

Also, if he spent the same amount on medical bills that he withdrew, not all of it is going to be excluded from penalty. Because you can only exclude the amount that is allowed as a medical deduction, which is the amount AFTER the 7½% haircut. It's not really fair, but that is the way the law is written.