IRA Withdrawal Penalty Exception
A new client in his mid 40’s withdrew $130,000 in 2009 from his IRA. He is self employed and had net self employment income of $20,000. His health insurance premiums in 2009 were $12,000 and he had “deductible medical expenses” of $16,000 (this is over the 7.5% AGI floor and does NOT include his health insurance premium). (He has filed an extension for 2009)
My questions are these:
1. How does the IRS define an “unemployed” person for purposes of the 10% penalty exception when you are self employed when paying health insurance premiums?
2. I assume the answer is no, but can he deduct his $20,000 of health insurance premium as a business expense AND add the $12,000 premium to his total “medical expenses” on his Schedule A, thus pushing his “medical expense” deduction to $36,000?
3. If he is able to count the $12,000 of health insurance premium as an “exception against the 10% early withdrawal penalty”, how is that handled and documented since he is self employed.
He had to take out $130,000 from his IRA because he did not make nearly as much money as he usually does AND because he had a lot of medical expenses.
Thank you!!
Permalink Submitted by Alan Spross on Thu, 2010-05-20 23:11
1) Following is copied from Sec 72t and shows the definition of disability for SE persons in the final paragraph:
>>>>>>>>>>>>>>>
(D) Distributions to unemployed individuals for health
insurance premiums
(i) In general
Distributions from an individual retirement plan to an individual after separation from employment –
(I) if such individual has received unemployment compensation for 12 consecutive weeks under any Federal or State unemployment compensation law by reason of such separation,
(II) if such distributions are made during any taxable year during which such unemployment compensation is paid or the succeeding taxable year, and
(III) to the extent such distributions do not exceed the amount paid during the taxable year for insurance described in section 213(d)(1)(D) with respect to the individual and the individual’s spouse and dependents (as defined in section 152).
(ii) Distributions after reemployment
Clause (i) shall not apply to any distribution made after the individual has been employed for at least 60 days after the separation from employment to which clause (i) applies.
(iii) Self-employed individuals
To the extent provided in regulations, a self-employed individual shall be treated as meeting the requirements of clause (i)(I) if, under Federal or State law, the individual would have received unemployment compensation but for the fact the individual was self-employed.
>>>>>>>>>>>>>>.
2) He can probably deduct the SE health insurance premiums as a business expense, but that is somewhat outside the scope of this forum. The medical expenses in excess of 16,000 can go on Sch A, but your totals do not seem correct.
3) Use Form 5329 to show the dollar breakdown of the various penalty exceptions. You cannot count the health insurance premiums more than once. It usually works best to max out the HI unemployment exceptions since the 7.5% reduction does not apply, and use the remaining medical expenses that are excess of 7.5% of AGI.
Permalink Submitted by Joe Hong on Mon, 2015-03-16 22:56
Where can i find the above publication information on IRS website. I do have a client who is self employee and is currently crying of $1000/month medical insurance premium. Thank You.
Permalink Submitted by Alan - IRA critic on Tue, 2015-03-17 00:08
See “medical” on this list. But note that health insurance premiums only apply to the unemployed who have collected UC:http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions