Withdraw from IRA to make medical insurance premium payments
I just discovered this rule and wish to withdraw from my IRA to do this for 2009 COBRA payments.
I have been unemployed since February, I have been on unemployment insurance longer than 12 weeks consecutively, I intend to take the withdrawal in 2009. Near as I can find I’m allowed to do this but I need clarification.
1) Can I withdraw an amount to cover ALL Cobra payments for 2009? My first 4 months were free as part of severance package(company paid COBRA), so I have been paying just over $500 a month since June. Can I simply take the monthly figure and multiply by 7 to cover June-Dec and withdraw that amount from my IRA in December? I avoid the 10% penalty and the money is just taxed as ordinary income correct?
2) If I am still unemployed in 2010, am I allowed to make a monthly withdrawal to cover the monthly COBRA expense, or do I have to wait until the end of 2010 and do one lumpsum withdrawal?
3) if I instead took the withdrawal in January 2010, does it then count as 2010 income or is it still 09 and no advantage to waiting?
thank you
Permalink Submitted by Alan Spross on Thu, 2009-10-15 19:14
You didn’t say anything about the federal COBRA subsidy. I think it pays around 65% of your Cobra premiums. That is probably the first thing to check into.
The penalty exception is somewhat tricky. You can take the distribution in more than one year, and the income will be taxable in the year of distribution, but the penalty exception only applies to premium payments made IN THE YEAR of distribution. In addition, note that there is no double dipping between this exception and the unreimbured medical expense exception that can also include premium payments. So if you also have the medical expense exception, do the premium payment exception first, and then take the premiums out of the other medical expenses for the other exception that has the 7.5% of AGI floor.
Re your specific questions:
1) Correct – it is easier to control the process to wait until you know (or have paid) the costs and take the distribution in December. You will need Form 5329 to report the penalty exception on your tax return. You don’t need to tell the IRA custodian what the distribution is for as they are going to Code it with a “1” anyway, ie an early distribution.
2) You can take withdrawals monthly, as there is no limit to the number of withdrawals. If you take out the funds in advance and then secure work, you may have exceeded the roll over period of 60 days. And remember that there is only one rollover allowed per IRA account per 12 month period.
3) If you take a withdrawal in 2010, it is reportable in 2010.
As you can see, this is a juggling act, managing your premium payments, the amount and date of the IRA distribution and the calendar year cutoff. One thing that makes it easier is that Cobra payments cannot be made late and you probably do not pay them in advance, just month to month. If you get the federal Cobra subsidy, then you cannot count premiums that you are reimbursed for, so this is another consideration you probably should try to finalize before year end.
Permalink Submitted by Russ Smith on Thu, 2009-10-15 19:58
Thanks for your reply, very helpful.
I am getting the federal subsidy so when I say my COBRA is ~ $500 a month, that’s AFTER the 65% subsidy, it would be $1500 a month without which is
why I’m considering withdrawing from my IRA to cover the costs. I will make the withdrawal in Dec 09 to keep it simple so it will be an 09 income and then if I’m still unemployed in 2010, I will make withdrawals to cover the costs that year. It appears Obama is leaning towards extending the subsidy on COBRA, if he doesn’t, being able to take the $1500 a month from my IRA to cover a paid premium will be a huge help, I’m actually surprised this rule isn’t being more heavily publicized I would imagine many people who take money out of a 401K or IRA and get penalized don’t realize they can do this from an IRA(not a 401K) penalty free using this rule.
I have form 5329 already printed out plus the relevant pages(54 and 55) from publication 590 on the irs.gov website.
Thanks again for the help.