early distributions exceptions

[Possi]

I have 2 clients with early distributions and questions on each.

To qualify for the exception for purchase of first home, must it be IRA distribution or can it be a regular retirement account. I told the client we could only exclude the amounts from the 1099s marked "IRA" and that total was only 4700 of 10000. The balance of the excludable 10000 would have come from a retirement account that was not marked "IRA."
RIGHT?

On the second one, my client had a bad setback of alchohol and cocaine addiction. He cleaned out his retirement accounts. His medical bills were large, going into rehab and paying for health insurance during his unemployment. Must I reduce the exclusion by 7.65% X AGI?

For some reason, I was thinking if your medical expenses exceeded 7.65% of AGI, all could be excluded, but me thinks differently now...

[Brian EA]

I have 2 clients with early distributions and questions on each.

To qualify for the exception for purchase of first home, must it be IRA distribution or can it be a regular retirement account. I told the client we could only exclude the amounts from the 1099s marked "IRA" and that total was only 4700 of 10000. The balance of the excludable 10000 would have come from a retirement account that was not marked "IRA."
RIGHT?

On the second one, my client had a bad setback of alchohol and cocaine addiction. He cleaned out his retirement accounts. His medical bills were large, going into rehab and paying for health insurance during his unemployment. Must I reduce the exclusion by 7.65% X AGI?

For some reason, I was thinking if your medical expenses exceeded 7.65% of AGI, all could be excluded, but me thinks differently now...

#1. It has to be an IRA. No other plan is exempted. What your client should have done was to rollover the other plan contributions into an IRA and then take the distribution.

#2. Your %age is for SS and medicare taxation. For medical it has to be in excess of 7.5%

[Possi]

right, 7.5, but

...sorry, that's right, 7.5%.

So are all distributions excludable if medical exceeds 7.5%?
OR,
are only the amounts of medical over 7.5% excludable?

[Brian EA]

...sorry, that's right, 7.5%.

So are all distributions excludable if medical exceeds 7.5%?
OR,
are only the amounts of medical over 7.5% excludable?

Page 120 pub 17. You have unreimbursed medical expenses that are more than 7.5% of your AGI .

[Dennis V]

Excludable amounts

The amounts over 7.5% AGI are excludable. In other words, if you deduct it (or could) on a Sch. A, you can exclude that amount from the penalty.

[Jesse]

Curious

#1. It has to be an IRA. No other plan is exempted. What your client should have done was to rollover the other plan contributions into an IRA and then take the distribution.

There was a comment on another post that this cannot be done. I wrote it down on my list of things to look up after April because I don't need an immediate answer, but as long as you brough it up I thought I'd ask.

I thought that the w/drawal needed to be from an IRA, doesn't matter if the IRA was a rollover of a 401(k) and if it comes up in the future I don't want to mis-advise my clients. Do you know of any exceptions?

[Brian EA]

There was a comment on another post that this cannot be done. I wrote it down on my list of things to look up after April because I don't need an immediate answer, but as long as you brough it up I thought I'd ask.

I thought that the w/drawal needed to be from an IRA, doesn't matter if the IRA was a rollover of a 401(k) and if it comes up in the future I don't want to mis-advise my clients. Do you know of any exceptions?

That's exactly what I am saying.

[Jesse]

I know what you said

That's exactly what I am saying.

I guess I did not make myself clear. What was stated was that you cannot take 401(k) funds and roll them over into an IRA and then take the IRA funds to purchase the First Time home. The penalty exemption would not apply.

One example I can think of is if by QDRO a 401(k) of $25,000 is granted to an exspouse, can $10,000 be rolled over into an IRA and then used to purchase the first time home? Or because it was rolled from a 401(k) is the penalty exemption Void?

[Brian EA]

I guess I did not make myself clear. What was stated was that you cannot take 401(k) funds and roll them over into an IRA and then take the IRA funds to purchase the First Time home. The penalty exemption would not apply.

One example I can think of is if by QDRO a 401(k) of $25,000 is granted to an exspouse, can $10,000 be rolled over into an IRA and then used to purchase the first time home? Or because it was rolled from a 401(k) is the penalty exemption Void?

You can take any retuirement contribution and roll it into an IRA. Once it is an IRA you can always use it for First time home purchase, medical expenses, education etc. and avoid the penalty