Premature ira distribution
Hello Ed,
My name is Charles Allain III. I am a financial advisor in South Louisiana. You have been such a great help in the past and I wanted to reach out to you on the following subject. My client took out $6,000 from a traditional ira in 2017. She has not yet filed her taxes for 17′. The client is under age 59 and 1/2. She understands that she will need to pay taxes on the money withdrawn. She is trying to work around the 10% early distribution penalty. The money was used for medical expenses for her and her family. She was employed at the time of the withdrawal. Can she avoid the early distribution penalty? If so, how does the ira custodian and cpa need to code the withdrawal?
Thanks in advance!
Sincerely,
Charles Allain III
Permalink Submitted by Alan - IRA critic on Thu, 2018-09-06 16:28
If your client paid non reimbursed medical expenses in 2017 that exceeded 7.5% of her AGI, the amount paid in excess of the 7.5% AGI qualifies for the penalty exception. She does not have to itemize deductions to claim the penalty waiver. Her 1099R reporting the distribution will still have Code 1 in Box 7, but the tax preparer can override the Code 1 by filing Form 5329 and entering exception code 05 on line 2 of the form. Note that if was unemployed at anytime in 2017 and received unemployment comp there is also a different penalty exception for her medical premiums paid that is not subject to the 7.5% AGI limit. If that is also the case, please advise since the two exceptions must be coordinated in order to avoid duplication, and I can provide further info if that applies.