Early withdrawal IRA exception

[Super Mom]

I have a client with an early IRA withdrawal to pay for otherwise deductible medical expenses. How do I show that removal as to not trigger an IRS letter. I can just override the penalty on line 59 of my software, but I'm very leary of overrides!

[New York Enrolled Agent]

Use Form 5329

[DonB]

I have a client with an early IRA withdrawal to pay for otherwise deductible medical expenses. How do I show that removal as to not trigger an IRS letter. I can just override the penalty on line 59 of my software, but I'm very leary of overrides!

I,m unaware of an exception for medical expenses. code 7 is for IRA distributions made to unemployed individuals for health insurance premiums.

[Rapid Robert]

I,m unaware of an exception for medical expenses. code 7 is for IRA distributions made to unemployed individuals for health insurance premiums.

Agree. A qualified plan (NOT and IRA!) does have a medical-related exception on Form 5329, but only for the amount of expenses that exceed a 10%-AGI floor. An IRA has no such exception. For example, if AGI is $50K, and medical expenses are $7K, only up to $2K distributed from a 401(k) plan would avoid the early distribution penalty.

"Qualified retirement plan distributions up to the amount you paid for unreimbursed medical expenses during the year minus 10% (or 7.5% if you or your spouse were born before January 2, 1952) of your adjusted gross income (AGI) for the year."

[TaxGuyBill]

A qualified plan (NOT and IRA!) does have a medical-related exception on Form 5329, but only for the amount of expenses that exceed a 10%-AGI floor. An IRA has no such exception.[/i]

I haven't looked up the legal gibberish, but IRS web-pages say that applies to an IRA as well.

https://www.irs.gov/taxtopics/tc557

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

[Rapid Robert]

I haven't looked up the legal gibberish, but IRS web-pages say that applies to an IRA as well.

Thank you, I think you are correct. I was reading the 5329 instructions for the exception codes, and they seemed to draw a distinction between IRAs and "qualified retirement plans", but then upon second look I see they mention:

IRAs,
Other qualified retirement plans,

so it seems IRAs are also qualified retirement plans, at least for some purposes.

If Congress really wanted to do something useful (hah!), they could eliminate the complexity around all the minor and somewhat arbitrary differences between IRAs and employer-sponsored plans.

[New York Enrolled Agent]

Thank you, I think you are correct. I was reading the 5329 instructions for the exception codes, and they seemed to draw a distinction between IRAs and "qualified retirement plans", but then upon second look I see they mention:

IRAs,
Other qualified retirement plans,

so it seems IRAs are also qualified retirement plans, at least for some purposes.

If Congress really wanted to do something useful (hah!), they could eliminate the complexity around all the minor and somewhat arbitrary differences between IRAs and employer-sponsored plans.

In the byzantine world of taxes, there are numerous definitions.

For purposes of §72(t), the definition of qualified retirement plan is found in §4974(c) and the IRA is indeed included.

One other note, I believe the 7.5% (not the 10%) threshold is in effect for 2017 and 2018.