January 15, 2009 12:00 am

No Penalty Waiver for Hardship Withdrawals from IRAs

Those under age 59½ are subject to a 10% early distribution penalty for withdrawals that do not meet any of these specified reasons:

  • Payment of first-time home-buying costs (up to $10,000)

  • Payment of qualified higher education costs

  • Payment of medical expenses in excess of 7.5% of adjusted gross income (AGI)

  • Distributions due to an IRS levy

  • Qualified reservist distributions

  • Payment of medical insurance by someone who is unemployed

  • Distributions taken in the form of an annuity over a set period

There is no specified exception from the penalty for financial hardship, other than those that conform to listed exceptions.

For example, in one recent case a taxpayer, age 53, who lost her job took IRA withdrawals to cover medical costs that did not exceed 7.5% of AGI. She eventually lost her home and, subsequently, went on disability. The distribution was not only taxable but also subject to the 10% penalty. While her situation is unfortunate, the tax law does not provide any relief. The Tax Court refused to create an exception to the 10% for financial hardship; it’s up to Congress to do this.

Source: Best, TC Summary Opinion 2008-160


Tax Glossary

Accelerated cost recovery system (ACRS)

A statutory method of depreciation allowing accelerated rates for most types of property used in business and income-producing activities during the years 1981 through 1986. It has been superseded by the modified accelerated cost recovery system (MACRS) for assets placed in service after 1986.

More terms