Early IRA Distributions – laid off/COBRA runs out next year
L1: Early IRA Distributions – laid off/COBRA runs out next yearI am 55 in Nov.2011 & may need to take 5 equal annual distributions until May 2016 when I would be 59.5. I have IRAs appx. $250,000; ESOPstock appx.$200,000 no rollover allowed & not accesible until 62 or financial hardship, and company Vanguard 401k accounts of $25,000. I left these companies before age 55 so don’t think the 55 rule applies. I don’t qualify for unemployment so could the financial hardship rule be applicable?
Should I put IRA funds in Fed. insured money mkt, and take 5 annual payments of $50,000 each? Would Fidelity need to issue a particular kind of 1099 form?
Job hunt hasn’t been encouraging. Thanks for guidance.2011-06-04 22:54, By: Catch22, IP: [22.214.171.124]
L2: Early IRA Distributions – laid off/COBRA runs out next yearA 72t plan has a fairly low dollar limit for your annual distribution. You cannot just take the account balance and divide by 5. Current interest rates are very low and therefore even if you roll the 25k 401k into your IRA before starting your plan and use a 275k opening balance, your plan will only generate an annual distribution of ~13k. If the 13k is not enough, then you may have no choice but to bust your plan by taking more than 13k out of the IRA. This may all become a gamble when your Cobra runs out.
Whether your situation qualifies you for the ESOP distribution, or for rolling the ESOP shares into your IRA is plan specific. You will have to check with the plan administrator to determine that.You have some other flexible options, but only you will have to decide how beneficial they might be in your case. For example, you could start your 72t with the IRA balance you have and leave the 401k in place to use in emergencies. If the emergency is caused by medical expenses, taking a distribution from the 401k will qualify for a penalty exception to the extent your paid medical costs are more than 7.5% of your AGI. Another possibility if you get access to your ESOP shares later on, you could roll them (or cash proceeds)into an IRA and start a second independent 72t plan to supplement your first one. In your situation, you should become familiar with the penalty exceptions that apply to both your 401k money and to your IRA accounts because they differ in several areas.
Don’t worry about the 1099R. Most IRA custodians do not code them for the 72t exception, but that is simply resolved by filing a 5329 with your tax return to claim the 72t exception.
2011-06-05 00:13, By: Alan S., IP: [126.96.36.199]
L3: Early IRA Distributions – laid off/COBRA runs out next yearI think that you might be eligible for the exception for health insurance premiums for “certain unemployed taxpayers” ( 5329 code 7). This is an exception for distributions from an IRA.
I believe that this even applies to your eligiility to take the distributions now for the COBRA premiums, which would let you save some of your non-IRA assets from being used to pay the premiums in 2011 as well.2011-06-05 01:15, By: dlzallestaxes, IP: [188.8.131.52]
L4: Early IRA Distributions – laid off/COBRA runs out next yearTo qualify for the health insurance exception, UC must be collected for at least 12 consecutive weeks. However, Cobra or any other medical insurance or medical costs that would be eligible for the medical deduction counts toward reaching the 7.5% AGI threshold, even if youdo notitemize deductions.
And when Cobra expires, in order to preserve assets, you might end up with a high deductible plan.
2011-06-05 02:57, By: Alan S., IP: [184.108.40.206]
L5: Early IRA Distributions – laid off/COBRA runs out next yearThere is a separate exception for health insurance premiums paid during unemployment, and has nothing to do with the 7.5% medical expense exception.2011-06-05 05:12, By: dlzallestaxes, IP: [220.127.116.11]
L6: Early IRA Distributions – laid off/COBRA runs out next yearCorrect. There are two different exceptions, but the one that deals only with the cost of health insurance requires 12 weeks of UC to use it. This can get confusing because the insurance component costs are part of both exceptions. But there is no double dipping by using the same expenses for two exceptions, ie if the insurance costscan beused for the exception conditioned on UC benefits, they cannot be used again in the other exception that is linked to 7.5% of AGI.
Therefore, if the taxpayer qualifies for both, use the insurance only exception first because it is not limited to 7.5% of AGI. Then reduce the total medical costs by the insurance amount for figuring the other exception that is limited by AGI.
In this case, the insurance only exceptionCANNOT be used because there was no UC claim. Therefore, insurance costsshould be lumped together with other medical to see if the other exception can be used.
2011-06-06 18:11, By: Alan S., IP: [18.104.22.168]
L7: Early IRA Distributions – laid off/COBRA runs out next yearImissed the part of the posting about not being eligible for UC (probably because he “left the companies voluntarily before reaching 55”).
I just concentrated on the heading that said that he was “laid off”, which should have made him eligible for UC.
Or possibly he is eligible for UC, but thinks he isn’t. Especially since he is eligible for COBRA.
I’d have to check on the different eligibility requirements before agreeing or disagreeing.2011-06-06 20:49, By: dlzallestaxes, IP: [22.214.171.124]