IRA Distribution for COBRA
Husband and spouse are under 59 !/2. Both have IRA’s. Need to withdraw funds to pay for COBRA as husband has been unemployed since 07/01/07. Spouse has not been employed. Can distribution be made for COBRA payments that have been made since 12 wks following loss of employment? Will this distribution quality for the exception to the 10% penalty rule? Does cash distribution have to come from husband’s IRA or can it come from spouse’s as she is also covered under COBRA plan. Also, can COBRA payments still be claimed as medical deduction on tax return (married filing jointly). Thanks!
Permalink Submitted by Alan Spross on Thu, 2008-01-24 06:19
The Cobra premiums qualify for inclusion on Sch A as medical expenses subject to the 7.5% of AGI limit.
The penalty waiver situation is more complex. Basically, the exceptions that apply are a primary exception for Medical insurance expenses tied to UC benefits that you cited. The Cobra premiums that cover both spouses and dependents qualify on a first dollar basis, but only for distributions from the IRA of the spouse that collects the UC. If distributions are taken from the other spouse’s IRA, they do not qualify for this particular exception.
However, the Cobra and other premium costs that do not receive exemption under the above exception remain eligible under the Unreimbured Medical Expense exception. This exception differs in that either spouse’s IRA can be tapped, but combined with all the expenses eligible to be deducted (less those covered above) on Sch A if the couple had itemized, only those in excess of 7.5% of AGI qualify.
Therefore, these premiums actually could result in a penalty exception in both areas, although not for the same costs. You would have first compute the amount eligible for the first exception, then see if the rest could be excepted under the broader Medical Expense exception.
Form 5329 would then be attached with the appropriate amounts coded as 07 for the first exception and 05 for the second one.
Permalink Submitted by Audrey Fetzer on Thu, 2008-01-24 14:00
Alan, thank you for your reply! Perhaps you can help me with an additional question. Can the IRA withdrawal be done now in 2008 for the COBRA payments that were made in 2007? The same with unreimbursed medical expenses for 2007; can the IRA withdrawal be done in 2008? I would then file the 5329 with my 2008 tax return? Thanks for any help you can give me with this question.
Permalink Submitted by Alan Spross on Thu, 2008-01-24 22:27
Good question, and some considerable added complexity.
1) The Medical Insurance exception, the one you must address first and for which the distribution can only come from the IRA of the spouse collecting UC – the distribution can be made either in the year the UC was received OR the following tax year, but not later than 60 days following any re employment (Pub 590, p 53). However, the premiums must be paid in the taxable year that UC benefits were collected after 12 weeks. Obviously, the UC benefits could bridge two tax years and therefore the premiums could be paid in any year the UC benefit qualifies them. There does not seem to be any restrictions that the Cobra or other insurance covers only months under UC. It appears to include any premiums paid in the respective year even if coverage is for other months pre or post UC.
2) Unreimbursed Medical Expenses – This one restricts the exception to expenses paid only in the tax year in which the distribution is taken from either spouse’s IRA. Easier to understand, but more restrictive.
Permalink Submitted by Audrey Fetzer on Thu, 2008-01-24 23:09
Alan, thank you for your clear explanations in response to my questions. Your replies have been extremely helpful to me!