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 Instead of taking money from your savings account, you can have it withdrawn from your IRA.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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