Pulling $ from IRA for health ins, but have a corporation

Submitted by Lynn Fallon on Sat, 2009-01-31 16:48

Hello team,

I’ve been collecting unemployment insurance for the past 5 months and I’m technically eligible to pull money out of my IRA to pay for my family’s health insurance.

BUT, I’m currently purchasing the health insurance at a reduced rate because I have a corporation (S corp). The corporation is purchasing the insurance for the employees (my wife and I). AKA: I will be providing the IRA money to my corporation.

So, in this case, can I still use my IRA money to purchase the health insurance??

Thanks in advance!!!

LF



Submitted by Stephen Volk on Sat, 2009-01-31 19:52

Coachlf92, I’ve read about annuity issues concerning IRA roll in IRS Pub 970 on or about pg 52. Maybe something in there for you and your premiums.

Submitted by Lynn Fallon on Sat, 2009-01-31 22:44

Thanks much for trying to help….IRS Pub 970 is for education and did not have what I needed.

Can someone else please assist??

Cheers,

LF

Submitted by Stephen Volk on Sun, 2009-02-01 05:40

coachlf92, Sorry, I didn’t explain the relationship afforded tax exempt plans. Go to US code Title26, SubtitleD,chapter43,ss4973(a)(3). I used http://www.law.cornell.edu/uscode. Then look at ss4976(b)(4) same chapter to see if this fits the bill. But read 4976 (a) first. Good read! Hope this helps.

Submitted by Lynn Fallon on Sun, 2009-02-01 17:31

Hey Volks, I REALLY appreciate your assistance and the link to Cornell, but I still have not found the correct answer.

I simply need to know if I can use some of my IRA funds (without 10% penalty…) to pay for my family’s health insurance. My concern is that my S corp is purchasing my family’s health insurance. This would NOT be a question if my corp was NOT buying it (of course, I’m supplying the dollars to my corp in order to purchase the insurance — my business is brand new and still not profitable). FYI: I get a better health ins price for my corp.

Thanks for the effort!!! Anyone else out there…please help!

Thanks!

Submitted by Alan Spross on Mon, 2009-02-02 04:06

I think you should be OK claiming the penalty exception on Form 5329. There might be a provision that I am not aware of, but this is your way of purchasing coverage and there are no other covered people under the policy than your family. You appear to meet the requirements on p 53 of Pub 590 with respect to this exception.

Some additional logic here is that the S Corp is a pass through tax entity with the results ending up on your 1040. In addition, self employed health insurance does not have to be in the name of the S Corp in order to qualify for the SE deduction, so if it IS in the name of the S Corp it should not disqualify the coverage for the penalty exception on your IRA distribution.

Talk to your accountant about how best to structure this re a loan to the S Corp vrs addition of capital etc.

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