Roth IRA Early Distribution Exception
Situation as follows:
* Traditional IRA was converted to a Roth IRA in 2011. Trad IRA included some non-deductible contributions.
* A withdrawal from this Roth IRA is then taken before the 5 year holding period is over and before age 59 1/2.
* Only the converted amount and it’s earnings are in the Roth IRA at time of withdrawal. ( No original IRA contributions have been made since conversion.)
* Withdrawal is used to pay for unreimbursed medical expenses.
Questions:
1. If the entire amount is withdrawn for unreimbursed medical expenses. Which amounts are subject to tax and/or the 10% penalty?
2. If the 7.5% unreimbursed medical expense penalty exception applies what specific procedures are required in order satisfy this exception?
Such as: a) Required documentation to prove Roth withdrawal was used for qualified medical expenses?
b) Timing of withdrawal and payment of medical expenses?
c) Need proof that no other non-IRA assets were available to use medical expenses?
d) Any other requirements ?
Can you direct me to any reference material related to questions #1 and #2 ?
Permalink Submitted by Alan Spross on Wed, 2012-02-15 23:36
NOTE: All Roth IRAs of the owner must be considered. Therefore, these replies assume that this is the ONLY Roth IRA owned>
1. If the entire amount is withdrawn for unreimbursed medical expenses. Which amounts are subject to tax and/or the 10% penalty?
The entire distribution is tax free assuming any earnings that were generated are not distributed, just the converted amount. For the converted amount, the taxable amount of the conversion comes out first, but this does not matter if the entire conversion is distributed. The taxable portion of the conversion is subject to the 10% penalty, but the penalty can be waived by filing Form 5329 and showing the amount for which the penalty is waived. That amount is the unreimbursed medical expenses paid in the year of the distribution that exceed 7.5% of AGI. The non taxable portion of the conversion can be distributed penalty free because only the taxable portion is subject to the penalty.
2. If the 7.5% unreimbursed medical expense penalty exception applies what specific procedures are required in order satisfy this exception?
Such as: a) Required documentation to prove Roth withdrawal was used for qualified medical expenses?
There is no direct tracing requirements, therefore all you need to show are the paid bills. File the 5329 as explained above and retain copies of medical billings paid (regardless of when incurred).
b) Timing of withdrawal and payment of medical expenses?
Distribution and payment must be in the same calendar year. Medical expenses are the same types of expenses eligible for itemizing on Sch A. They include dependent’s medical expenses paid.
c) Need proof that no other non-IRA assets were available to use medical expenses?
No. And other assets do not matter even if the other assets paid the expenses before the Roth distribution was taken.
d) Any other requirements ?
No.
Note that there is no double dipping if the owner also uses the medical insurance penalty waiver available if 12 weeks of UC was collected. If medical insurance payments (not subject to 7.5% AGI) was used in that penalty waiver, then the insurance premiums cannot also be used in the Unreim Medical costs provision.