Early Withdrawal of an IRA – Medical

As we covered in a previous post, there are several ways to get at your IRA funds before age 59 1/2 without having to pay the 10% penalty. In this second post in our series about Early Withdrawals, we’ll cover the Medical purposes which allow this penalty-free distribution.

There are three different Medical reasons that can be used for an early withdrawal: high unreimbursed medical expenses, paying the cost of medical insurance, and disability. We’ll cover each of these topics separately below.

High Unreimbursed Medical Expenses

If you are faced with high medical expenses for yourself, your spouse, or a qualified dependent, you may be eligible to withdraw some funds from your IRA penalty-free to pay for those expenses. The amount that you can withdraw is limited to the actual amount of the medical expenses you paid during the calendar year, minus 7.5% of your Adjusted Gross Income (AGI – the amount on your Form 1040, line 38, or Form 1040A line 22).

You can only count medical expenses that would otherwise have been deductible as medical expenses on Schedule A of Form 1040 – but, you don’t have to itemize your deductions in order to take advantage of this exception to the 10% penalty.

Medical Insurance Premiums

You may be able to take a penalty-free distribution of some IRA funds to help pay for medical insurance premiums for yourself, your spouse, and your dependents, as long as the amount you withdraw does not exceed the amount you actually paid for medical insurance premiums, and all of the following apply:

• You lost your job.
• You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
• You receive the distributions during either the year you received the unemployment compensation or the following year.
• You receive the distributions no later than 60 days after you have been reemployed.

There is no income limitation on this provision.

Disability

If you become disabled prior to age 59 1/2, distributions in any amount from your IRA are not subject to the 10% penalty. Your disability must be considered of a long duration (greater than one year) or expected to result in death. The disability (physical or mental) must be determined by a physician.

Keep in mind, as we mentioned previously, these avenues provide a way to withdraw funds from your IRA penalty-free, but not tax-free. You will still be liable for ordinary income tax on any distributions that you take from your deductible IRA.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author