Can my wife claim an exemption from the retirement plan early distribution penalty if she has health issues and many medical bills?

by Michael J. Eby, CPA | Jul 11, 2019

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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.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Michael J. Eby, CPA, is partner with the tax services group of RKL LLP in Harrisburg, Pa.

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The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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