Client lost his job. Rolled his 401(k) to IRA. Health issues, health insurance and bills started. He is not even 50. In order to pay his bills cashed in over $150,000 of his IRA. No W-2 or any other income but the 1099R coded 1. Owing, you guessed it - the $15,000 10% penalty plus being taxed. The 5329 has exception code 07 that IRA distribution to unemployed for health insurance but cannot find if this would qualify or not. $8000 health insurance is not going to help that much for the code so under the other code 12 other - is there other exceptions in his case that would qualify for house payments or health issue that would help him. Any suggestion.
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Premature distribution penalty exceptions to consider:
If you are "totally and permanently disabled" by IRS definition, you can take distributions from your IRA without penalty.
High unreimbursed medical expenses for you and family. You are allowed to withdraw a limited amount -- the actual expenses minus 7.5% of your adjusted gross income -- without penalty.
Medical insurance premiums if collecting unemployment.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
Alcoholic consider a disability???
Thank your for your post. The client went off the deep end and became an alcoholic which affected his marriage and his health. His health got so bad that they had him on psychiatric review due to being depressed and he told me his liver was shot and that he had only few months to live but he is still going and on the right track he says now. What do you believe - I see where he paid for the psychologist from the billing. So will that qualify him for disability? He drank himself almost to death but only withdrew from his IRA -the $150,000 no unemployment so that won't work for the insurance code.
Thank you for your input.Comment
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Two things
First,
To be permenantly and totally disabled you need a note from a doctor stating that it is expected that the taxpayer will not be able to work in his occupation for at least 1 year or the condition is expected to result in death. This can be for a mental condition as well as physical. If he can't meet this test, I believe that all medical expenses in excess of 7.5% but now it may be 10% of income can reduce the penalized amount. TTB says the distribution has to be from a qualified plan but I have looked this up and for this situation an IRA is a qualified plan.Comment
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That won't work...
His job was eliminated so when he could not find a job - he found the bottle which also a break down due to not working or finding a job according to him. But what he has paid in the medical part is not the $150k which got a feeling that money a lot of it was spent again - on the bottle. So when I only find in his checking account is only $20k that will not work for the 10% even. The insurance that was paid works better deducting it on the schedule A then deducting it on the 5329 which insurance is only $$8000. So it looks like - screwed.
But thanks for your help in the thinking department. I was hoping.Comment
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Medical vs other exclusion
I think you are somewhat missing the forest for the trees here.
The only issue is (apparently) how much of the 10% additional penalty you can avoid.
It appears a bit unlikely that your client can meet the rather stringent requirements for total disability. Perhaps he can?
As for the medical expenses, the IRS defines what you can exclude via that route. In the simplest of terms, it is what can be included in deductible medical expenses, i.e. only >7.5% AGI floor. That could be a pretty high mountain to climb, merely from the Form 1099-R income. (And one would assume there were nowhere near $150k of medical expenses in the first place....)
The sheer dollar amount of the withdrawal is more indicative of drawing out funds.....for whatever personal reason(s), that likely will not meet the criteria to be excluded from the 10% additional penalty.
I think you may have a shot at excluding the penalty on SOME of the withdrawal (limited by medical expenses) and to a much lesser extent anything related to "disability." The client would have to be able to prove his "disability" falls within the IRS guidelines.
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