How to Tap Into an IRA for Medical Expenses

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Major medical expenses can create real hardships for you and your family. Pulling money from your individual retirement account to pay them will reduce the size of your retirement nest egg, but it might be the only option to cope with the immediate financial crisis. The Internal Revenue Service normally penalizes early IRA withdrawals, but will waive penalties when the money is for certain health care costs.

Traditonal IRAs and Medical Bills

The IRS tacks a 10 percent penalty onto other taxes due when you withdraw money from a traditional IRA before you are age 59 1/2. You can tap an IRA to pay unreimbursed medical expenses for yourself and members of your family. This exception applies only to expenses in excess of 10 percent of your adjusted gross income. Suppose your AGI is $70,000 and you must pay $10,000 in medical bills not covered by insurance. Subtract 10 percent of your AGI, or $7,000, which leaves $3,000. You can take $3,000 from your IRA without incurring the penalty tax. A threshold of 7.5 percent of AGI instead of 10 percent applies until the end of 2016 for people age 65 and over.

Health Insurance Premiums When Unemployed

Losing health insurance coverage while unemployed just makes a bad situation worse, so the IRS won’t penalize you for tapping an IRA to pay premiums while you’re out of work. The amount you withdraw can only be enough to cover health insurance premiums for yourself and your family. To qualify for this penalty exception, you have to receive unemployment benefits paid under a state or federal program for at least 12 weeks. Health insurance premiums have to be paid no later than 60 days after you go back to work.

Reporting IRA Early Withdrawals

IRS rules say you have to fill out a request for a distribution of IRA funds and give it to your IRA account provider. IRA providers must report the distribution to the IRS. Add the distributed funds to your gross income when you file your tax return. Even though you won’t have to pay the penalty tax, you may owe federal income tax on the withdrawn money. Normally, 10 percent of the amount you take out as an early distribution is withheld for taxes. However, you can tell your account provider not to withhold taxes if you wish.

Roth IRA Rules

There’s no tax write-off when you add money to a Roth IRA, so you can take contributed funds out at any time for any reason and you won’t owe any taxes. The situation is different if you withdraw more than the total contributions you’ve made since you started a Roth IRA and tap into the earnings. When you take out earnings as an early distribution, they are subject to income taxes and a penalty. The same rules govern early distributions from a Roth IRA that apply to traditional IRAs. If the withdrawal meets the exception criteria for paying medical expenses or health insurance premiums when you lose your job, you don’t have to pay the penalty.