hardship withdrawal from IRA

Submitted by Thomas Ferry on Thu, 2018-11-29 04:16

54 yr old client owes $80k to IRS for late income tax. Has $600k TIRA.

what are the requirements for being allowed to take a penalty free withdrawal from the IRA to pay taxes due? How late does taxpayer have to be, and does any formal lien/levy have to first be placed on taxpayer by IRS?

Once taken, can the distribution ever be re-deposited? If yes, what is the deadline for doing so?



Submitted by Alan - IRA critic on Thu, 2018-11-29 15:57

  • Once the IRS levies the IRA account, the resulting distribution of 80,000 will be penalty free under the IRS levy exception. However, the client will then owe taxes on the 80,000 distribution as well and of client wants to take more out of the IRA to pay those taxes, the additional amount will not be eligible for the exception. So if client takes out 100,000 to fund the tax bill on the entire 100,000 the penalty exception would only apply to 80,000.
  • There is no general hardship exemption available, but client might qualify for another penalty exception to cover the extra 20,000 distribution. Obviously, disability would eliminate the penalty on any amount, but high medical costs might be used to offset the penalty on some of the extra 20,000 distribution for example.
  • While an IRA 60 day rollover could replace the money, there is no source for such a rollover and if there was then no source to replace the taxes on that distribution.
  • If the IRS would accept an installment agreement, client could partition his TIRA into 2 accounts, one of them with a balance large enough to generate about a 20,000 annual distribution using a 72t plan. The plan would waive the penalty in the same manner as the levy exception, except that with a 72t plan, only 20,000 a year would be subject to ordinary tax instead of 100,000 in the first year with a penalty on 20,000 of it.  This still does not replace any of this IRA money once distributed, but reduces the tax and penalty so that additional distributions to pay that tax and penalty would be needed.

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