Form 5329 for Early Dist.

[cientax]

Question is, if client took out distribution from retirement plan to pay medical expenses after he was injured on his self employment job and the 1099R shows Code 1 in box 7, can he still qualify for the exception of the 10% penalty? Or does the 1099R have to show a different distribution code for the exception to apply?

[kcjenkins]

No, the exceptions codes and form 5239 are for exactly that situation. The payer does not know the details, and does not need to know them. They just report the distribution. You then use the 5239 to explain any exceptions.

Just remember that the medical exception is a bit nasty, it is ONLY for the amount that is properly claimed on the Sch A, after the 7.5% limitation. Be prepared with a printout of those rules, as most clients assume that all amounts used for medical bills are exempt.

[TAXBILLY]

It is true that the medical expense over 7 1/2% of AGI escapes penalty but be aware that you do not have to itemize to take advantage of the exception:

http://www.irs.gov/pub/irs-pdf/p590.pdf

taxbilly

[kcjenkins]

Right, Bill, I should have made that clear. You use the Sch A medical part to calculate how much 'would be allowed' and that amount escapes the penalty, even if you do not in fact itemize. I always print and keep that Sch A calculation in my file, if we do not itemize.

[Gail in Virginia]

I thought the exception codes for medical, education and first time home purchase only applied to IRA distributions. If this was a distribution from a qualified plan, which is what I understood from the language retirement plan, do those exceptions even apply?

[TAXBILLY]

I thought the exception codes for medical, education and first time home purchase only applied to IRA distributions. If this was a distribution from a qualified plan, which is what I understood from the language retirement plan, do those exceptions even apply?

Go to 5329 and look at each exception. IRA specific doesn't apply to medical expenses.

taxbilly

[kcjenkins]

I believe exception 05 applies to both retirement plans and IRAs.