How to Use an IRA for Medical Premiums
An individual retirement arrangement account can accumulate a fairly substantial nest egg with regular participation, and you may need to access it at times other than retirement. Medical premiums are a big expense, and you may wish to tap into your IRA money to pay them. If you are over age 59 1/2, you can withdraw from an IRA for any reason, and just pay any applicable taxes on the income. If you are under age 59 1/2 and withdraw from a traditional IRA to pay medical premiums, you do not have to pay the 10 percent tax penalty under certain conditions.
Secure suitable health plan coverage. If you were covered while at work, you will receive a letter from your employer outlining COBRA coverage, which allows you to pay for your benefits and continue your healthcare coverage for up to 18 months. The premium for this arrangement should be less than an individual plan due to the group discount.Step 2
Apply for and receive unemployment benefits. To use a traditional IRA deduction and not pay the 10 percent early-withrawal penalty if you're under age 59 1/2, you need to receive unemployment compensation benefits under a state or federal program for at least 12 consecutive weeks.Step 3
Request a disbursement from the IRA account. You can contact your trustee, who may need you to fill out a form or may be able to transfer the money on your request.Step 4
Pay the required premium to your health plan provider. Make the payment by check or money order to document that it was made from your account.Step 5
File IRS Form 5329 with your yearly tax return. Enter the total amount of the distribution on line 1 of the form, and on line 2 enter the amount that is exempt from the additional 10-percent tax penalty on a traditional IRA disbursement, and the amount of the health insurance premiums. Use the exemption code 07 on line 2 to specify that you claim the exemption from the penalty because you used the money to pay healthcare plan premiums.
- Carefully document the withdrawal of the funds from the IRA and the use of these funds to pay premiums. Use a separate checking account to receive the distribution and pay the premium so the money is not co-mingled with your own funds. If you have a Roth IRA, you can deduct your contributions tax and penalty free at any time.
- While you can waive the penalties on your early IRA disbursement when paying healthcare plan premiums, you still are responsible for the taxes on the disbursement if you have a traditional IRA. This amount is taxed at your normal income. Plan on paying this when you file your income taxes.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.