Unemployed while Self-employed?

[PDAllen]

Client (age 52) has a schedule C LLC consulting business. No employees. She did not have any clients from SEPT-DEC. Took money from her SIMPLE IRA in order to pay bills, including health insurance premiums on a policy obtained through the marketplace.

Can she claim she was unemployed and needed the money for the health insurance premiums in order to avoid paying the 10% penalty on the SIMPLE withdrawal?

[taxmom34]

did client work from January to September? the tax return is for the entire year, not just from September to December.

[Kram BergGold]

Half the Answer Answer

See TTB page 13-3, item 07.
Now you just have to find out if a SIMPLE is treated the same as an IRA which I assume it is, but that is just an assumption.

[taxea]

I believe that if she had an open business she would not be able to do what you suggest just because she had no clients. However if she took the money out to pay premiums and payment of premiums qualifies under medical exemption of the withdrawl then she should be able to claim that amount. If she used funds for other reasons then that portion would not qualify for the exemption. You may need to allocate.
She is either employed, self-employed or unemployed...she can be employed and self-employed but not one of those and unemployed at the same time

[mactoolsix]

The word "unemployed" has nothing to do with the penalty exception for IRAs when used for medical expenses.

The amount that escapes the 10% penalty is limited to the actual amount of the medical expenses paid during the calendar year, minus 10% of the AGI.

Being unemployed would reduce the AGI and thus the medical threshold and the penalty, but unemployment is not a requirement.

http://www.bradfordtaxinstitute.com/Endnotes/IRC_Section_72t2B.pdf

SIMPLE IRAs have that 2 year rule on withdrawls, however it looks like the medical exception would skip that too:
https://www.irs.gov/Retirement-Plans...-Distributions (see the 4th question)

[TaxGuyBill]

The word "unemployed" has nothing to do with the penalty exception for IRAs when used for medical expenses.

The amount that escapes the 10% penalty is limited to the actual amount of the medical expenses paid during the calendar year, minus 10% of the AGI.

Being unemployed would reduce the AGI and thus the medical threshold and the penalty, but unemployment is not a requirement.
http://www.bradfordtaxinstitute.com/...tion_72t2B.pdf

That is one exception to the penalty, but there is another exception specifically for unemployed individuals paying insurance premiums. That one does not have the 10% AGI limit.

§72(t)(2)(D):

(D) Distributions to unemployed individuals for health insurance premiums
(i) In generalDistributions from an individual retirement plan to an individual after separation from employment—
(I) if such individual has received unemployment compensation for 12 consecutive weeks under any Federal or State unemployment compensation law by reason of such separation,
(II) if such distributions are made during any taxable year during which such unemployment compensation is paid or the succeeding taxable year, and
(III) to the extent such distributions do not exceed the amount paid during the taxable year for insurance described in section 213(d)(1)(D) with respect to the individual and the individual’s spouse and dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof).
(ii) Distributions after reemployment

Clause (i) shall not apply to any distribution made after the individual has been employed for at least 60 days after the separation from employment to which clause (i) applies.
(iii) Self-employed individuals

To the extent provided in regulations, a self-employed individual shall be treated as meeting the requirements of clause (i)(I) if, under Federal or State law, the individual would have received unemployment compensation but for the fact the individual was self-employed.

https://www.law.cornell.edu/uscode/text/26/72#t_2_D

[mactoolsix]

Thank you Bill

I had forgotten about that.