Traditional IRA-Early Distribution

[LisaAnn]

Taxpayer took out $14,000 from Traditional IRA due to being unemployed. Received unemployment for 14 months until he found a new job. He used most of the distribution to supplement basic living expenses. $1,680 was used for medical insurance premiums in 2009.

Early distribution penalty applies because taxpayer was separated from employment at age 54 not 55.

My question is: Can the $1,680 be deducted on form 5329 using the medical nsurance premiums code for an exception? Or am I understanding the regs. correctly that because the distribution was higher than the insurance premiums paid the $1,680 is not an exception?

Thanks!

[RitaB]

TP can escape the penalty on whatever portion of his medical/dental expenses exceed 7.5% of AGI. He does not have to itemize, but include the Sch A. All the medical, dental, eye, mileage, etc that qualifies for Sch A can be used for this purpose. So, if it makes line 4 of Sch A, you can use it on the 5329 with code 5.

Does not matter that the distribution exceeded the expenses, or if he can trace those particular funds to a medical expense.

[LisaAnn]

TP can escape the penalty on whatever portion of his medical/dental expenses exceed 7.5% of AGI. He does not have to itemize, but include the Sch A. All the medical, dental, eye, mileage, etc that qualifies for Sch A can be used for this purpose. So, if it makes line 4 of Sch A, you can use it on the 5329 with code 5.

Does not matter that the distribution exceeded the expenses, or if he can trace those particular funds to a medical expense.

Hi Rita,

Thanks for responding.

Below is the quote from the IRS website under Early Distributions from IRA--Exceptions:

"Medical insurance. Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.

You lost your job.

You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.

You receive the distributions during either the year you received the unemployment compensation or the following year.

You receive the distributions no later than 60 days after you have been reemployed.

It's the 'not more than' that makes me think I can't use the $1,680 as an exception. Taxpayer doesn't have any other medical expenses.

What are your thoughts?

[Tax Prep by Deb]

Hi Rita,

Thanks for responding.

Below is the quote from the IRS website under Early Distributions from IRA--Exceptions:

"Medical insurance. Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.

You lost your job.

You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.

You receive the distributions during either the year you received the unemployment compensation or the following year.

You receive the distributions no later than 60 days after you have been reemployed.

It's the 'not more than' that makes me think I can't use the $1,680 as an exception. Taxpayer doesn't have any other medical expenses.

What are your thoughts?

My thoughts would be that you can use an exception to the penalty up to the amount paid for the medical insurance. In other words what it is saying is that not all of the distribution applies to the exception, only the amount actually used to pay for his health insurance would be. The remainder would be subject to the penalty.

That's just my thought!

Deb!

[LisaAnn]

Thanks Deb.

It does seem "logical" that he should get the exception for $1,680 that he paid in medical insurance.

Anyone else?

[RitaB]

Thanks Deb.

It does seem "logical" that he should get the exception for $1,680 that he paid in medical insurance.

Anyone else?

Yes, he can use exception code 07 on the 5329 to escape penalty on the $1680. They are just saying you can't escape the penalty for distributions that exceed your medical insurance payments. (Unless you have other medical, which your client does not.)

[Lion EA]

You can't exclude MORE THAN $1680 from the penalty. He can take out more, but he'll pay the 10% penalty, unless another exception applies.

[Don in Upstate NY]

Now I see the confusion - there are two different exceptions to the penalty due to medical expenses ...

Exception 05 applies to qualified retirement plans [e.g. 401(k)] for medical expenses in excess of 7.5% of your AGI, and

Exception 07 applies to IRAs for medical insurance premiums while unemployed.

It's all in the instructions for form 5329.

[Catherine]

Now I see the confusion - there are two different exceptions to the penalty due to medical expenses ...

Exception 05 applies to qualified retirement plans [e.g. 401(k)] for medical expenses in excess of 7.5% of your AGI, and

Exception 07 applies to IRAs for medical insurance premiums while unemployed.

It's all in the instructions for form 5329.

Astounding what you can find in the instructions IF you get out your magnifying glass (and put the phone on voice mail long enough to slog through them!). Just found some stuff there myself on another matter I was ready to post on...

[LisaAnn]

Thanks everyone!

It just seems that at this time of year the littlest things don't make sense. Could it be mental burnout?

[RitaB]

It's all in the instructions for form 5329.

LOL. Yeah, and I didn't pick up on the "qualified distribution" part, either. Oops. Also, looks like the age 55 doesn't apply to IRA distributions, and I missed that entirely as well, and I swear I used to know that.

And yes, LisaAnn, our brains are fried. I forgot the word "shoe" the other day. And, it was not related to taxes. I just wanted my son to pick up his shoes.