Form 5329 Exception Code 05

[Hoosier]

Client comes in this year with a 1099-R with an early distribution code 1 in box 7. The distribution was from existing 401k plan for $7,000 but there was no amounts withheld in box 4. Turns out that client has a Hardship Distribution Election Form from the 401k plan administrator thus the reason for no federal withholding. The reason for the hardship withdrawl is for medical expenses. Client is able to itemize but tells me that there is not enough out-of-pocket medical expenses to meet the 7.5% AGI threshold for medical expenses on Schedule. I decide to review the Form 5329 instructions for claiming the exception to the 10% early distribution penalty and read the following for code 05: "Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus 7.5% of your adjusted gross income for the year". I come to the conclusion that the client cannot claim the exception code 05 on form 5329 since total out-of-pocket medical expenses do not exceed 7.5% of AGI. The 10% early withdrawl penalty will be calculated on form 5329 and entered on page 2 of the 1040. Is this conclusion correct or is fatigue setting in to the point that I can no longer function? Thanks for any thoughts or advice.

[WhiteOleander]

Yes, you can only use the amt of medical expenses that exceed the 7.5% AGI. You do not have to be able to itemize.

[David1980]

You could even file without the 5329 since all of it is subject to the 10% penalty. Just enter the 10% Penalty direct to the 1040. (But if your software requires the 5329, no sense in fighting it, it's fine either way.)