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Columns: Tax Talk
George Saenz, CPA Expert: George Saenz, CPA
Tax Talk
In this case, IRA early-distribution penalty may not apply
Tax Talk

Is tapping an IRA worth the penalty?

Dear Tax Talk:
I have AIDS and have been on disability for many years. I have $20,000 in an IRA and want to use it for some facial surgery, as the disease and the years have not been flattering. I get disability income and Social Security benefits annually, but usually owe very little tax. If I pull the money out of my IRA, am I subject to the 10 percent penalty?
-- Fred

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Dear Fred:
If you receive a distribution from your traditional IRA, you will receive a Form 1099-R early in the next year showing your distribution for the prior year. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.

The IRA custodian will probably indicate that it is an early distribution unless he or she knows of your disability. An early distribution is indicated by a number "1" in box 7.

If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10 percent additional tax.

You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued and indefinite duration.

If you're receiving disability benefits from Social Security, it is apparent that you are disabled. You should file Form 5329 with your Form 1040 for the year of distribution indicating that the 10 percent penalty does not apply because of disability.

Although your withdrawal may not be subject to penalty, you have to include it in your income and pay tax on it. Your tax rate could be between 25 percent and 35 percent depending on all your income.

In addition, remember that the greater your income, the greater the amount of Supplemental Security Income (disability) benefits that are taxable. This has the effect of pushing you into a higher tax bracket.

Generally, cosmetic surgery is not a deductible medical expense. You can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease. Discuss this with your doctor to see if your procedure can qualify as a medical expense.

If you can deduct the procedure, it will help mitigate the income taxes from including the distribution in income.

Bankrate.com's corrections policy -- Posted: July 25, 2007
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