72T and health insurance premiums
L1: 72T and health insurance premiumsWe have a client that needs to start taking 72t distributions.Is he ableto takeSEPP and take an additional distribution to pay for his families health insurance premiums without incurring a penalty because he meets theunemployedindividuals for the payment of health insurance premiums exception ?2010-08-11 20:35, By: z0101ggy, IP: [126.96.36.199]
L2: 72T and health insurance premiumsThere has been one court case that allowed educational expenses in addition to SEPP distributions. You can find a summary athttp://72t.net/Articles/ArticleShow.aspx?WA=aa61d472-0237-4cb8-9e91-a5f3f52fa1a5
The only exceptions to SEPP distributions are death and disability – any other additional distribution is open to IRS scrutiny and going to tax court isn’t inexpensive.
Since your client has time, why not start by dividing the IRA into seperate accounts: 1) SEPP; and 2) Health Expenses.2010-08-11 20:54, By: Gfw, IP: [188.8.131.52]
L3: 72T and health insurance premiumsI like that idea. It protects the SEPP, and he would have the same 10% penalty only on the health insurance distributions if IRS did not accept the same reasoning as the court case.2010-08-11 21:49, By: dlzallestaxes, IP: [184.108.40.206]
L4: 72T and health insurance premiumsI think dlz meant to say that there would be no penalty on distributions from the non SEPP IRA for the health insurance distributions. Or that the penaltyWOULD apply to distributions from that IRA only if expenses due to any other exception were not paid.
Since he cannot stay on UC for more than a couple years and the exception extends to distributions for one extra year, the non SEPP IRA would also be used for medical costs over 7.5% of AGI, higher education expenses, first home etc. He would take distributions needed to pay these other expenses from the non SEPP IRA and claim the exception on Form 5329, the same form he would probably need to use for the actual SEPP account distributions, just a different exception code.
But he would have to closely manage the distributions to meet the requirements of the particular exception including when the distribution must be made for expenses incurred at a particular time. Fortuneately, there are NO tracing rules that apply here. That means that he can pay expenses from the distributions from EITHER IRA as long as the annual total from each IRA matches the amounts required by the SEPP and the other exceptions.
And if he runs out of exceptions, he can always start a second independent SEPP plan from the second IRA, and the penalty would be avoided for all distributions from each.
These options really require some planning, and when it comes to UC and medical expenses, there is always going to be the unexpected event that causes your IRA management to be revisited.
But I still like this idea better than depending on one lone PLR that was addressed to higher education only. Depending on that would produce a long period of uncertainty and possibly subject you to the $10,000 plus cost of securing your own PLR.
2010-08-12 01:40, By: Alan S., IP: [220.127.116.11]