L1: Medical ExpensesI am 55 years old and setup a 72t three years ago in January after a layoff. Can expenses that normally are not taxable from an IRA, such as medical premiums, be declared as such and not be considered ordinary income from the 72t distribution? THX2014-04-08 22:11, By: Frank001, IP: [126.96.36.199]
L2: Medical ExpensesYou apparently misunderstand the related tax regulations.
The exception that you are referring to is an exception to the 10% penalty for “early distributions” before age 59 1/2, not that these distributions would not be taxable.
However, all but 7.5%, oops now 10% under age 65, of these distributions would be deductible as medical expense itemized deductions.2014-04-09 02:00, By: dlzallestaxes, IP: [188.8.131.52]
L2: Medical ExpensesAs DLZ indicated, distributions to pay medical expenses are taxable, however I think your basic question is whether the distribution to pay these expenses can be taken in addition to the 72t plan calculated distribution without blowing up the plan. The short answer is no. You would bust the plan and owe the retroactive penalty and interest, but you could claim the eligible penalty exceptions for either or both the medical costs in excess of 10% or the health insurance premiums if you collected UC for 12 weeks. That might reduce your current year penalty, but your 72t plan will have been terminated.
Note that the Benz case (look up under articles on this site) is a single IRS PLR under which a 72t participant took an additional distribution to pay higher education expenses and the IRS allowed his 72t plan to continue. He claimed the penalty exception for both the 72t and the higher education expenses. This case should probably be considered an aberration at this point because there have been no confirming rulings, and in any event you probably do not want to go through the cost and uncertainty of filing for your own ruling.
If your 72t plan distributes an inadequate amount anyway without the medical costs, and would be unlikely to survive until 59.5, you might consider busting the plan, taking the medical exception and starting a new plan because a busted plan after 3 years is cheaper than a busted plan after 5 or 6 years. These are some considerations to think about if you cannot come up with the extra money to pay the expenses.
2014-04-09 02:40, By: Alan S, IP: [184.108.40.206]