dissolving an IRA


M

Max

I'm self employed and put $1,000 into an IRA a couple years
ago. I never got around to setting up an account with a
brokerage and just left it in a savings account at my bank.
Needless to say, the value of my IRA has not been exactly
stellar. (The $1,000 has shrunk to $995 after all the
fees.)

I don't think an IRA is the best place for my $1,000 at this
time. I would be better off with that money invested in my
company or in a HSA (health savings account). At any rate,
I don't want it stuck in this IRA any longer.

I'm undergoing a dental procedure that will cost $3,500. I
paid $1,700 of that in December and will pay the balance in
Feb. I think I've read that if I have medical expenses of
7.5% (which $3,500 is) of my taxable income I can use the
IRA money for that expense without penalty. Is this
correct? And will that bill qualify if it is paid in two
tax periods?

If that isn't correct, what kind of penalty will I incur
dissolving my IRA?

Thanks.
 
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H

Herb Smith

Max said:
I'm self employed and put $1,000 into an IRA a couple years
ago. I never got around to setting up an account with a
brokerage and just left it in a savings account at my bank.
Needless to say, the value of my IRA has not been exactly
stellar. (The $1,000 has shrunk to $995 after all the
fees.)

I don't think an IRA is the best place for my $1,000 at this
time. I would be better off with that money invested in my
company or in a HSA (health savings account). At any rate,
I don't want it stuck in this IRA any longer.

I'm undergoing a dental procedure that will cost $3,500. I
paid $1,700 of that in December and will pay the balance in
Feb. I think I've read that if I have medical expenses of
7.5% (which $3,500 is) of my taxable income I can use the
IRA money for that expense without penalty. Is this
correct? And will that bill qualify if it is paid in two
tax periods?

If that isn't correct, what kind of penalty will I incur
dissolving my IRA?
Assuming you took a deduction the year of contribution for
this IRA, any funds withdrawn are taxed at your highest
marginal tax rate. If you are under age 59-1/2 at the time
of withdrawal, there is a 10% early withdrawal penalty added
on. If the funds are used to pay medical bills that EXCEED
7.5% of your AGI, then the 10% penalty is waived for those
funds. You DO NOT have to itemize all your deductions (i.e.
you can use the standard deduction) to claim this exception.
If the unreimbursed medical expense is paid in two tax
years, then you have to meet the 7.5% of AGI floor in the
year that the IRA funds are withdrawn and used for this
purpose.
 
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P

Phil Marti

Max said:
I'm undergoing a dental procedure that will cost $3,500. I
paid $1,700 of that in December and will pay the balance in
Feb. I think I've read that if I have medical expenses of
7.5% (which $3,500 is) of my taxable income I can use the
IRA money for that expense without penalty. Is this
correct? And will that bill qualify if it is paid in two
tax periods?
It's medical expenses EXCEEDING 7.5% of AGI (not taxable
income), so it looks like you're out of luck. To compound
your problem it goes by taxable year, not by procedure.

You'll owe income tax and a 10% penalty to when you close
the account. (You'll probably get hit with another fee from
the custodian, too.)

Phil Marti
Topeka, KS
 

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