Russ Smith

I found something interesting about IRA's and I'm trying to clarify it. According to publication 590 of the US tax code you can make withdrawals from an IRA penalty free if you are using the funds to pay medical insurance premiums(like Cobra). The exact wording is on page 54 of publication 590 at http://www.irs.gov/pub/irs-pdf/p590.pdf

I can't cut and paste from the PDF but essentially to qualify you have to

1) Lost your job
2) Received unemployment benefits for at least 12 weeks
3) Receive the IRA distributions in the year you receive the unemployment compensation or the following year.
4) You receive distributions no later than 60 days after you are re-employed.

I'm taking this to mean if you get laid off, are on EDD for more than 12 weeks and you stop taking the distributions once you get a new job, it's legal to do this and avoid the 10% penalty. I checked with Fidelity and they believe that's the case but suggested I talk to a CPA.

The IRS would require me to file a form 5329 with my 2009 taxes which basically explains why I'm eligible to take withdrawal without incurring the 10% penalty. The money is taxed as ordinary income but if you think about it if you're unemployed your income is low anyways(in my case just unemployment checks) so your taxable income will be lower than normal in the first place so the taxed as income part doesn't concern me at all.

I'm mainly trying to verify that this is true and wondering how I could confirm that because if it's true it's a huge advantage for someone like me who's paying for either private insurance or Cobra while on unemployment. Instead of taking money from your savings account, you can have it withdrawn from your IRA.

Note, you can't do this from a 401K, only an IRA. IF you were laid off and have a 401K, you can roll it into an IRA and you would then be able to do this yourself assuming this is in fact true.

Anybody ?

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Linderbee

This would be perfect for the Money & Finance forum...

Sorry, got nothin', Russ.

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Zeno

We got a Money & Finance forum?

LVG

It's being discussed by the Mods. Vote for or against it in the poll in the EE forum.

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Russ Smith

Would definitely make a good forum.

FYI I am trying to see a CPA but based on what I've googled it looks like you can in fact withdraw from an IRA and cover all your medical premiums if you meet the criteria I listed above.

I was thinking I would just do a withdrawal every month starting with November to cover that months Cobra but after looking it appears I can actually withdraw for all the way back to June 09. I got my first 4 months of Cobra free as part of my severance so I can't do those months but starting with June on I can.

It's no penalty but it gets taxed as regular income when you file your 09 taxes. Would be huge for me I'd get about $3500 back.

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“Your expectations always exceed outside expectations. I feel like you just can’t stop working, can’t stop getting better, because I’ll be a failure in my eyes before I’m a failure in someone else’s eyes.” -- Arron Afflalo

Derm

Yes, you can take a distribution for the medical expenses under those circumstances with being subject to a premature distribution penalty of 10%. You'll notice a distribution code on the form 1099R from the IRA's trustee. A premature distribution will show a code of 1. The trustee should be able to code it as 2 (distribution with special circumstances) so that you won't have to file form 5329. But if you have to, the form is simple. Just have your backing information available for the next 3 years if and when your return is "inspected". Which it probably will be.

Russ Smith

What backing information would be required, cancelled checks to the company handling my Cobra? I was thinking of asking them for a printout in January of my 2009 expenses so I could use that as backup?

I'm now intending to do this in January so it counts as 2010 income. It's just for premiums, not medical expenses, you can do it for medical expenses too but I am only doing it for monthly Cobra premiums.

__________________
“Your expectations always exceed outside expectations. I feel like you just can’t stop working, can’t stop getting better, because I’ll be a failure in my eyes before I’m a failure in someone else’s eyes.” -- Arron Afflalo