72t with medical distribution

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L1: 72t with medical distribution
I am contemplating starting a 72t plan this year. I have extenuating distributions though. I was hospitalized at the beginning of the year, and health insurance had lapsed. I had in excess of 20k of unreimbursed medical bills which I paid, and have taken
distributions from my IRA to cover them.
The expenses were well in excess of 7.5% of my estimated 2011 income, so it is my understanding that the 10% penalty does not apply.
My question is this: Can I still initiate a 72t plan this year, or have the previous medically exempt distributions messed this up?
2011-08-18 17:43, By: dpantle, IP: []

L2: 72t with medical distribution
The SEPP 72-T is ONE of the provisions to waive the 10% penalty. Medical Deductions is a different one, but equally valid.
The fact that you used the medical provision first does not preclude your setting up a SEPP 72-T this year.
Usually we have the question asked for the reverse sequence where someone has set up a SEPP 72-T, and THEN needs more money for medical expenses. I do not believe that there is any reason for the IRS to bust a SEPP 72-Tif someone has that situation, but
others may have some concerns because the IRS has not definitively stated their acquiescence in that situation, yet.
2011-08-18 18:05, By: dlzallestaxes, IP: []

L3: 72t with medical distribution
I agree that different penalty exceptions for distributions prior to the start of your SEPP plan will not affect the plan, but you will have multiple exception codes to report on your 5329.
With respect to the medical and insurance costs, these are separate exceptions but the insurance premiums are linked to collecting UC for 12 consecutive weeks and have no 7.5% of AGI floor. Therefore you should determine the
max amount of premium expenses under that exception and add the medical expense exception not using the premiums because you cannot double dip for the premiums. Compare that with throwing all the expenses under medical expense exception and then use the highest
total exception amount.
2011-08-18 18:36, By: Alan S., IP: []

L4: 72t with medical distribution
Clarification — I think you will have multiple 5329 forms to file, each with it’s own exception code, and related amount, rather than multiple codes and amounts on a single 5329 form.
Alan makes an assumption that I did not see indicated in the initial posting, which is why I did not mention it — Were you “unemployed”, or not able to work for medical reasons ? This would apply to the 3rd exception provision that Alan mentioned, if applicable.
2011-08-18 18:46, By: dlzallestaxes, IP: []

L5: 72t with medical distribution
I have been unemployed all of this year, but not due to my illness. I think both of you gave me the answers to my questions.
I believe I would file seperate 5239’s. One using exception code 5 for my unreimbursed medical expenses (-7.5% AGI), then a seperate 5239 using exception code 2 for the SEPP. Does this sound about right?
I do have health insurance now, but it is paid out of a business (S Corp) my wife and I own. Therefore, the premiums are not paid out of any direct income.
2011-08-18 20:32, By: dpantle, IP: []

L6: 72t with medical distribution
The 5329 Inst lack some detail, but multiple code 12 clearly applies in the case of multiple exceptions. Therefore, you would file only one 5329 and should attach an explantory statement listing the amounts for each particular
For example, if all 3 exceptions applied for different amounts, list them as follows:
1) Exception Code 02 for the SEPP distributions taken after the start of the SEPP
2) Exception Code 05 for unreimbursed medical costs over 7.5% of AGI
3) Exception Code 07 for health insurance premiums for the unemployed
Any distribution taken after the SEPP starts can only be applied to Code 02. But if you took out MORE than amounts you paid for 05 or 07 prior to the SEPPbutactuallypaid for after the SEPP begins, you can apply these exceptions
for those costs because they were paid for in the same calendar year.
Will have to look into the business payment of the premiums further. But it does not appear you can treat the premiums as being paid from an IRA distribution if you paid them out of the business account. That may be true even
though you cannot deduct those premiums on line 29 of Form 1040 because your business had no profit. There is obvious inconsistency when you are trying to be considered as unemployed and self employed at the same time.
2011-08-18 22:50, By: Alan S., IP: []

L7: 72t with medical distribution
Gotcha, thanks. Should claim code 12 with explanatory statement. Code 05 expenses have already been paid, and I anticipate SEPP starting in early December.
The S Corp business is a small retail store I bought for my wife many years ago. I am not actively employed by that business, I’m only listed as Treasurer, and only claim the passive income (profit) on my 1040 line 17, as well as my wife’s salary on line
The premiums are dealt with on the 1120S line 19 as insurance (at least it appears that way, will call tax preparer to confirm or correct my thinking). Anyway, it’s not claimed on line 18.
2011-08-19 01:14, By: dpantle, IP: []

L7: 72t with medical distribution
In 50 years in practice, I’ve never seen code 12 used. With the IRS’ incompetence in understanding SEPP 72-T in general, I’m curious if anyone has used code 12, and if IRS understood it or needed documentation, and how long it took to get IRS ok.
My inclination would be to use 3 separate 5329 forms, unless I find out that IRS can handle code 12 properly.
2011-08-19 20:23, By: dlzallestaxes, IP: []

L8: 72t with medical distribution
The Form 5329 Inst. have had a multi exception code number for several years (was Code 11 previously), but the instructions do not contain advice how to provide the breakdown, which appears to be an obvious need.
Attaching extra 5329 forms would probably work just as well, one for each different exception code, IF your tax software supports it (or preparer’s software).

2011-08-19 22:30, By: Alan S., IP: []

L9: 72t with medical distribution
I am about to start my SEPP. I have a question about what valuation date of my account to use.
Most, if not all literature I have read says I can use the valuation at 12/31 of the previous year (2010), which is a valuation I would prefer.
My question is, since I have taken medically qualified distributions (which I will file seperate 5329), do I have to use a valuation date after the last medical distribution? Or can I use the 12/31/10 valuation?
2011-10-25 21:27, By: dpantle, IP: []