Exceptions on Early Disributions

[Super Mom]

Just want to check. The taxbook shows medical expenses that would be deductible on A as exception to penalty (page 13-3 of 1040 Plus). It also refers to an IRC section which I read. I had a new client today whose son is having heart surgery later this year and she wants to get out her 401K---not penalized if has otherwise deductible med expenses to cover, correct?

[Super Mom]

That just seems to easy, don't deal with this a lot so this is new to me. But the way I'm reading the law, it sure seems deductible, but I have been wrong before!!

[Super Mom]

I researched this board and found a post from 2013 that says limited medical expenses over 7.5% of income. That would be the same as A--so now it makes more sense!!!!

[FEDUKE404]

Exclusion of deductible medical expenses

I researched this board and found a post from 2013 that says limited medical expenses over 7.5% of income. That would be the same as A--so now it makes more sense!!!!

I think your interpretation is correct, viz only the deductible medical expenses (those above the 10% or 7.5% AGI floor) can dodge the 10% withdrawal penalty.

(I've often wondered how that works for the "big" medical expense in the presence of the "regular" medical expenses. Who's on first. . .??)

Of course, post 2016 everyone is staring down the 10% AGI floor for medical expenses.

Maybe some of our more learned board members can clear up the fog on this issue. . .

FE

[kathyc2]

Just want to check. The taxbook shows medical expenses that would be deductible on A as exception to penalty (page 13-3 of 1040 Plus). It also refers to an IRC section which I read. I had a new client today whose son is having heart surgery later this year and she wants to get out her 401K---not penalized if has otherwise deductible med expenses to cover, correct?

You don't indicate if Mom can claim son as a dependent. If not, it would not qualify. The exception only applies to the medical expenses over 10% of AGI. The wording of "whether the employee itemizes" can be confusing. A taxpayer can qualify for the medical expense deduction on A but not itemize if the total of Sch A deductions is below the standard deduction.

Has your client considered if it makes more sense to take a loan from the 401K rather than a distribution?

[Super Mom]

Yes, she does claim the child. They are considering all of their options, I just wanted to give them accurate information. It's heart surgery, so I'm sure it will be a BIG expense unless their insurance is MUCH better than mine!!

[New York Enrolled Agent]

You don't indicate if Mom can claim son as a dependent. If not, it would not qualify.

Kathy - I think you are also covered if the son is not a dependent but would be a dependent except for failing the gross income test (the so-called medical dependent). I think the §213 exception applies to §72 but I stand to be corrected.

[kathyc2]

I believe you are correct. With it being heart surgery, I was envisioning an adult child the parent was trying to help.