How to Cash in My SIMPLE IRA for a Major Unreimbursed Medical Expense

by W D Adkins

    A Savings Incentive Match Plan for Employees is a traditional IRA designed to allow small businesses to provide retirement benefits. SIMPLE IRAs have some special rules that govern employee and employer eligibility and contributions. Otherwise, SIMPLE IRAs follow traditional IRA rules. A SIMPLE IRA is always fully vested -- all money in the account, including employer contributions, is yours and you may withdraw it at any time, subject to Internal Revenue Service restrictions. You may be able to use cash from a SIMPLE IRA to pay major unreimbursed medical expenses.

    Step 1

    Multiply your adjusted gross income by 7.5 percent. The IRS normally imposes a 10 percent penalty tax for withdrawals from a SIMPLE IRA before you reach age 59 1/2. However, when you have unreimbursed medical expenses that are more than 7.5 percent of your AGI, you may pay the excess amount using IRA funds.

    Step 2

    Add up your unreimbursed medical expenses for the year. Be sure to add qualified expenses like prescription drugs and visits to your doctor or dentist to your major unreimbursed medical costs. Don’t include expenses paid for by your insurance, your employer or out of a health savings account.

    Step 3

    Subtract 7.5 percent of your AGI from your total unreimbursed medical expenses. The remainder is the amount you may withdraw from your SIMPLE IRA without incurring the 10 percent penalty tax.

    Step 4

    Complete IRS Form 2306T, “Traditional IRA Withdrawal Instruction,” and submit to your SIMPLE IRA trustee. Tell the trustee what you are doing to ensure you follow any other required procedures. Withdraw only the amount in excess of 7.5 percent of your AGI from Step 3.

    Step 5

    Report the withdrawal of funds from your SIMPLE IRA on your income tax return. Although you won’t have to pay the penalty tax if you follow the steps above, you are still liable for ordinary income taxes on the withdrawn money.

    About the Author

    Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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