My wife has a 1 in the distribution code in my 1099-R cash-out. She has had health issues as of last year, and she has a lot of medical bills that equate to more than 8% of our adjusted gross income. Will she be able to claim an exemption from the early withdrawal penalty? She also went to school for higher education. Will it help her to claim exemption? If it does. what document do we need to present or save for later if the IRS wants proof?
I recommend you check out the IRS’s guidance regarding early distribution exceptions. Both qualified higher education and unreimbursed medical expenses above a certain AGI percentage (see details in the link) can qualify for exceptions to the early withdrawal penalty. The information that should be kept on file are invoices for the qualified expenses as well as proof of payment (such as cancelled checks, credit card/bank statements, etc.). You would complete Form 5329 when completing your annual tax return.
As a note for future planning, I recommend consulting with a tax adviser for the best approach for early withdrawals of retirement funds. For instance, a taxpayer may be able to take a nontaxable distribution from his or her Roth IRA up to his basis in the Roth IRA.
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Answered by: Michael J. Eby, CPA, is partner with the tax services group of RKL LLP in Harrisburg, Pa.