IRA CD: Taking Money for Hardship
I have an Individual that has come to me needing to take money from an IRA CD that matures on November 8th. They need a portion of the money because the company that this individual works for has not paid its employees for over a month. The option to quit/go on strike is out because the ability to drawl unemployment would terminate. Is there a way that they would be able to take the IRA monies without being penalized since the individual is only 53 years old? Hardship withdrawal? Has a child in college as well, is there any way to work it out to pay for education? How would that need to be initiated for tax purposes and should they hold out any taxes if the monies are taken hopefully without a penalty? Please advise. Thank you in advance!
Permalink Submitted by Jose Morales on Tue, 2008-11-04 16:44
The exceptions to the premature distribution penalty are as follows:
– Death of the IRA owner
– Disability
– Health Insurance Premiums
– Medical Expenses
– First Time Home Purchase
– Higher Education Expenses
– IRS Levy
– Substantially Equal Periodic Payments
You can take a distribution of IRA funds and use them however you wish and as long as you return them to an IRA account (rollover) within 60 days you will also avoid the early withdrawal penalty.
Whether they should withhold a portion of the distribution for federal and/or state taxes is a question that an individual needs to consult a competent tax advisor in order to get the best answer for his/her situation.
Permalink Submitted by mk foss on Tue, 2008-11-04 17:57
Some of the items on the list seem to be perfect for the individual’s situation. The use of IRA funds for health insurance premiums and higher education would generate taxable income but no 10% penalty.
Those 2 items are not specifically coded on Form 1099R. The individual should just request a withdrawal and need not furnish an explanation. If all goes well, they can pay back some or all of the distribution within 60 days. Otherwise, they must attach Form 5329 to their tax return and show on that form the amount of dollars used for a qualifying exception.
With the higher education exception there is no dollar limit but the amount withdrawn must match the amount expended in the same calendar year; the funds cannot be used to pay college loans.