How to Take Medical Hardship IRA Distributions on a Tax Return

Generally, taking money out of your Individual Retirement Account before turning 59 1/2 is a no-no because of the 10 percent early withdrawal penalty. However, if you have medical expenses for the year that would be deductible if you itemize your deductions, you can exempt that portion of the early IRA distribution from the penalty. Qualifying medical expenses include those you pay for medical, dental and vision care for yourself, your spouse and your family. Claiming the exception saves you the 10 percent early withdrawal penalty, so not reporting it properly can be a costly mistake.

Step 1

Report the amount of the distribution on line 15b of Form 1040. Even though some or all of your IRA distribution qualifies for an exemption from the early withdrawal penalty, you still have to pay income taxes on the distribution.

Step 2

Report the amount of the IRA distribution on line 1 of Form 5329.

Step 3

Calculate the amount of your medical expenses exemption and report it on line 2 of Form 5329. The exemption amount equals your medical expenses minus the specified percentage of your adjusted gross income. In 2012, the threshold is 7.5 percent, but it increases to 10 percent in 2013 and beyond. For example, if you have $9,000 in medical expenses, the threshold is 10 percent and you have an adjusted gross income of $60,000, your exemption is $3,000.

Step 4

Enter the code "05" next to line 2 on Form 5329 to indicate you're claiming the medical expenses exemption.

Step 5

Subtract the amount of your exemption from the amount of your IRA distribution to figure the amount of your distribution that is subject to the early withdrawal penalty and report the result on line 3 of Form 5329. If the result is less than $0, you don't owe any early withdrawal penalties. In this example, if you took out $5,000 and your exemption is only $3,000, you still owe the early withdrawal penalty on $2,000 of the distribution.

Step 6

Multiple the portion of the distribution by 0.1 to figure the 10 percent early withdrawal penalty and report it on line 4 of Form 5329 and line 58 of Form 1040. In this example, the penalty on the $2,000 that is not exempt would be $200.

Items you will need

  • IRS Form 5329
  • IRS Form 1040

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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