The contributions you make to your
IRA are intended to supplement your income during your retirement years. However, as much as you would like to let your IRAs remain untouched until retirement, unforeseen expenses may force you to
distribute some of those assets prematurely.
Should you decide to take a distribution from your IRA, these amounts may be subject to federal and state taxes, and, if you are under the age of 59.5 when the distribution occurs, you may be assessed an additional 10%
early-distribution penalty on any taxable amount. The
IRS imposes this penalty to deter individuals from taking premature distributions from their retirement accounts. Here we outline the circumstances under which the IRS will waive this early-distribution penalty. (For information on withdrawing from IRAs, see
Tax Treatment of Roth IRA Distributions.)
Un-reimbursed Medical Expenses If you do not have health insurance or your medical expenses are more than your insurance will cover for the year, you may be able to take penalty-free distributions from your IRA to cover these expenses. Note, however, that only the difference between these expenses and 7.5% of your
adjusted gross income (AGI) is eligible for this exception. For example, if your adjusted gross income is $100,000 and your un-reimbursed medical expenses are $10,000, the maximum amount that you can distribute penalty free is $2,500, which is the difference between $10,000 and 7.5% of your AGI ($7,500). Your tax professional should be able to help you determine your AGI.
Medical Insurance
If you are unemployed, you may take penalty-free distributions from your IRA to pay for your medical insurance. In order for the distribution amount to be eligible for the penalty-free treatment, you must meet these certain conditions:
- You lost your job.
- You received unemployment compensation paid under any federal or state law for 12 consecutive weeks.
- You received the distributions during either the year you received the unemployment compensation or the following year.
- You received the distributions no later than 60 days after you have been re-employed.
If You Are Disabled If a physician determines that, because of a mental or physical disability, you are unable to engage in any gainful employment, you are allowed to take penalty-free distributions from your IRA. Also, the disability must be expected to result in your death or determined to last for an indefinite period. These distributions can be taken for any purpose. Check with your IRA custodian/trustee regarding their policy for handling distributions due to disability, as some require proof of disability in the form of a physician's certification.
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