Hi, In 2008 I withdrew about $6000 from my IRA to help pay for living expenses and some educational expenses. I was told that I may have to pay a 10%penalty for early withdrawal. However, that was my only source of "income" in 2008 (I have no W2 forms for 2008 as I did not work). I also took out an internal loan with TIAACref for ($6k), but they told me that I won't have to pay the penalty on that since it is a loan. I have no savings account and I pretty much spend all that money so I didn't gain any interest. Will I have to pay the penalty?

Thanks for any help!

Publication spells everything out.

There are a few reasons the penalties are not assessed. Very few. First time home buyers, disability and possibly education. Get pub 590 from Internal Revenue Service (http://www.irs.gov).

The rules for Roth and traditional IRA's may be different.

The penalty will have to be paid unless you qualified for a hardship withdrawal where the penalty id waived. You will also have to pay taxes on the amount of the withdrawal regardless of whether it qualifies for a hardship or not. If that was your only income for the year, it may not be enough to owe taxes, but you still have to file and pay the 10%.

It was withdrawn from a traditional IRA and it was because of hardship (absolutely no other income). Are you saying that I have to file and pay the penalty but that I will likely get the penalty refunded? Also, is there a formal way to claim hardship? Also, can I file an extension since I don't have the money to pay the penalty by April 15.

Thanks again.

Forgot to mention that I ended up using about 50% for educational expenses.

Did you read the publication that KISS mentioned. If no, then go and read the section on Early Distributions.

You will have gotten a 1099 for the distribution you will have to report that. I'm not sure if you can exclude only a portion from the penalty. I would suggest cointacting the IRS and asking them.

OK, I just filled out form 1040A and when I added it all up and after taking the standard deduction, my taxable income is "0". So what does that mean? I don't have to pay the penalty? Here's what I did: My total income on Line 15 of the form came out to $5500, the standard deduction is $5450, for a difference of $50. Subtracting from that $3500 for my single exemption, gets me into negative and so my taxable income is "0".
So what do I do now? My form tells me I owe nothing... should I still pay the penalty? Nowhere on the form 1040A does it ask about the penalty. Please help!

The penalty is outside your taxable income. Its entered on a different line of the 1040 (I forget which). So you would still owe the penalty even if you don't own taxes.

OK, I read 590 and there is a form 5329 which deals with this. So, depending on how much I claim in higher eductation expenses and possibly unreimbursed medical expenses, I may have to pay up to $550. IS there any way for me to request a refund for that, i.e.. How can I let the IRS know that this was a hardship withdrawal?


One more thing it mentions is that for SIMPLE IRAs penalty is 25%. I have a traditional IRA... is that considered a SIMPLE IRA?

Read about Trad IRA Your U.S. Tax Return: Traditional IRA and Roth IRA (http://taxipay.blogspot.com/2008/05/traditional-ira-and-roth-ira.html)

You can check with the trustee for your IRA as to what the penalty should be. But no, whatever the penalty calculates out to be depending on hardship qualifications, is what you need to pay.

Thanks all for your help. At this point all I need to know is whether I can file some form to claim that my IRA withdrawal was because of hardship. I really can't afford to pay the $550 penalty. Is there anyway for me to get that refunded?

OK, thanks Scott. Our posts crossed. I guess I better suck it up and pay up.

Just to clarify the procedure for reporting the withdrawal and penalty on your tax return:

First, if an early withdrawal penalty is due you must use Form 1040, not 1040A. Report the distribution on line 15 of Form 1040. Then report the 10% early withdrawal penalty on line 60 of form 1040 (“Additional tax on IRAs, other qualified retirement plans, etc.") In this way the penalty is included even if you don't otherwise owe any income tax.

If the withdrawal was used to pay qualified higher education expenses then you can avoid the penalty. You should complete form 5329 to show that the penalty is not due.

Then report the 10% early withdrawal penalty on line 60 of form 1040 (“Additional tax on IRAs, other qualified retirement plans, etc.") In this way the penalty is included even if you don't otherwise owe any income tax.

If the withdrawal was used to pay qualified higher education expenses then you can avoid the penalty. You should complete form 5329 to show that the penalty is not due.

Thanks, for clarifying, I knew it was on the back of the 1040.

But what happens if only part of the withdrawal was used for hardship purposes? Does the 5329 allow you to claim partial exemption from the penalty?

But what happens if only part of the withdrawal was used for hardship purposes? Does the 5329 allow you to claim partial exemption from the penalty?

Yes - on line 2 of 5329 you enter the portion of the distribution that is not subject to the early withdrawal penalty, along with the appropriate reason code, which is 08 for higher education expenses.

Thank you so much for clarifying. Can you comment on one more thing: I would like to claim both higher education expenses as well as unreimbursed medical expenses (code 05), does that mean I put code 12 in the box? If so, how do I indicate that it was for the two exceptions I listed?

Also, I am not sure I fully understand the unreimbursed medical expenses exception. This is what they write:

Qualified retirement distribution up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 7.5% of your adjusted gross income for the year.

What does the above mean?

My unreimbursed medical expenses are $2400. My higher education expenses are approx $1500. Subtracting that from the $5500 early distribution is $1600, so I owe $160 in taxes. Only thing is, how do I know if my medical expenses qualify?

Finally, will I also have to pay state tax on this early distribution?


Thanks a million!! I really appreciate it.

Hello TT. Regarding the medical expenses: you qualify for the medical expense exemption only to the extent that these expenses exceed 7.5% of your Adjusted Gross Income (AGI). For example: if your AGI is $20K, then any expenses above $20K * 7.5% = $1,500 qualify for the exemption. Hence in this example if you had $2400 in expenses and $20K AGI you would qualify for the exemption for $2400-$1500 = $900 of the withdrawal. If 7.5% times your AGI is greater than your unreimbursed medical expenses, none of the expenses would qualify for the exemption from the penalty.

As for state income taxes - it really depends on your particular state/locality. In general those states that allow you to take a deduction for IRA contributions take taxes upon distribution. Conversely, those states that do not allow you to deduct IRA contributions may allow you to take withdrawals tax free. You really need to check the rules for your particular state.

Thank you so much!! I am just now filling out the forms and a few questions have come up...

-- Income
My only income for 2008 was whatever I withdrew from my retirement account with TIAA Cref. I took out $5500 from my IRA (for which I have to pay a 10% penalty) and I also got an "internal" loan from TIAA Cref for $7000 (Distrubution code "G"). They had told me that I did not have to pay a penalty on it for early withdrawal because it is a loan. However, do I have to report this $7000 as income? Is my income for 2008 $5500 or $12500?

FYI, I received two 1099R, one for $5500 with distribution code "1" and one for $7000 with distribution code "G". For the loan, I also received form 5498 "IRA contribution information". On that form everything is "0' except box 2 "Rollover contributions" is "$7000". Can I claim this as a "Retirement savings contribution credit" (line 51) and fill out form 8880? (Im thinking no, because it says on the form 8880 that "Rollover contributions" can't be included. Is my understanding correct?)

- Tuition/Education
There are two education related deductions on 1040 : On line 34 the "Tuition and fees deduction", and line 50 "Education credits". I know I can only claim one or the other; however, can I, in addition to one of the above, file form 5329 to claim the exception for higher education expenses for the $5500 early withdrawal? It seems I should be able to do so...it certainly doesnt state anything against that on form 5329. (FYI, my education related expenses for 2008 are about $2000.) ,


--Medical
I want to claim the unreimbursed medical expenses exception on form 5329, however I am concerned about the language in the description of the exception. Why do they call it "Qualified retirement distribution"? Is my $5500 a qualified retirement distribution ? I am under the 59.5 age, so does that qualify me? If yes, I had about $2500 in unreimbursed medical expenses. This was for elective surgery... does that matter? Can I still claim it since I was not reimbursed for it. I truly hope so...

I know this is a lot of questions so I really appreciate any feedback... simple yes/no suffice :)

Thanks a million!!

Hello TT. Regarding the medical expenses: you qualify for the medical expense exemption only to the extent that these expenses exceed 7.5% of your Adjusted Gross Income (AGI). For example: if your AGI is $20K, then any expenses above $20K * 7.5% = $1,500 qualify for the exemption. Hence in this example if you had $2400 in expenses and $20K AGI you would qualify for the exemption for $2400-$1500 = $900 of the withdrawal. If 7.5% times your AGI is greater than your unreimbursed medical expenses, none of the expenses would qualify for the exemption from the penalty.



So, let's say my AGI is $12500. Multiplied by 7.5% is (rounded off) $938. Subtracting that from $2400 I get $1462. Let's assume I also take the $2000 higher education exception:

Then, one line 1 of form 5329 I put: $5500
On line2 I put: $3462
Since I am taking two exceptions, I put code 12 for the exception number.
So, the amount subject to additional 10% tax is: $2038.

Question: How does IRS know that I am taking an education and medical exception if I can only put one code in the box for line 2? Or don't they need to know?

Thanks again!

If you have multiple exceptions, fill out TWO Forms 5329.