Can You Use Your IRA to Buy Health Insurance?

Monday, May 18, 2015

By The Slott Report Staff
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We were recently asked whether you can use your IRA to buy health insurance. The short answer to that question is yes, but it will cost you. Technically, once you take an IRA distribution, you can use that money to buy anything, whether it’s a new car, a vacation, or another gift or necessity. However, the distribution from your IRA will be taxable as ordinary income. In addition, if you are under age 59 ½, the 10% early distribution will generally apply as well. But, there is an exception to the 10% early distribution penalty if your IRA distributions are not more than the cost of your health insurance due to a period of unemployment and you received unemployment compensation.

You may not have to pay the 10% penalty on IRA distributions during the year that are not more than the amount you paid during the same year for medical insurance for yourself, your spouse, or your dependents (such as your children). According to information on page 24 of the 2014 version (which is the current version) of IRS Publication 590-B, you won’t have to pay the 10% penalty on your early IRA distribution if all of the following conditions apply:

  • You lost your job.
  • You received unemployment compensation under any federal or state law for 12 consecutive weeks because you lost your job.
  • You receive the IRA distributions during either the year you received the unemployment compensation or the next year.
  • You receive the IRA distributions no later than 60 days after you have been re-employed.

If you qualify for this exception to the 10% penalty, you must claim it by filing IRS Form 5329 with your federal income tax return for the year. But remember, qualifying for this exception to the penalty does not mean that your IRA distribution is tax-free. Unfortunately, you will still owe income taxes on the IRA withdrawal.

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