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:
Disability

• 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.