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Author: GrahamInv Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: 401k withdrawal Date: 9/2/2011 5:39 PM
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In the 2009 tax year we had big medical bills as my wife had a heart attack and had to have stents inserted. I took an early 401k distribution to pay the medical bills. A few weeks ago I got a CP2000 notice requesting payment of a 10% tax penalty, although I'm pretty sure this particular distribution was exempt since it was used to pay medical debts. Should I challenge the notice? If so, what evidence should I send?
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113897 of 121061
Subject: Re: 401k withdrawal Date: 9/2/2011 8:41 PM
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In the 2009 tax year we had big medical bills as my wife had a heart attack and had to have stents inserted. I took an early 401k distribution to pay the medical bills. A few weeks ago I got a CP2000 notice requesting payment of a 10% tax penalty, although I'm pretty sure this particular distribution was exempt since it was used to pay medical debts. Should I challenge the notice? If so, what evidence should I send?

You should pay the penalty. Early distributions from IRAs can avoid the 10% excise tax if they meet certain conditions (medical expenses in excess of 7.5% of AGI is one), but the exemptions do not apply to early distributions from 401(k) accounts.

Ira

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113898 of 121061
Subject: Re: 401k withdrawal Date: 9/2/2011 9:20 PM
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In the 2009 tax year we had big medical bills as my wife had a heart attack and had to have stents inserted. I took an early 401k distribution to pay the medical bills. A few weeks ago I got a CP2000 notice requesting payment of a 10% tax penalty, although I'm pretty sure this particular distribution was exempt since it was used to pay medical debts. Should I challenge the notice? If so, what evidence should I send?
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You should pay the penalty. Early distributions from IRAs can avoid the 10% excise tax if they meet certain conditions (medical expenses in excess of 7.5% of AGI is one), but the exemptions do not apply to early distributions from 401(k) accounts.

Ira

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I don't think that's right, Ira. Some of those exceptions to the 10% penalty are specific to IRAs only, but I don't think that's one, as I read it.

Bill

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113899 of 121061
Subject: Re: 401k withdrawal Date: 9/2/2011 9:30 PM
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Back to the OP's question. I would respond to the notice with a letter and a Form 5329, showing on lines 1-2 the amount of early distribution, and the amount that qualified as deductible medical expenses. Enter Code 5 on the current year form; I think it was the same in 2009.

(The amount is limited to the amount deductible; you don't have to itemize but if you did, maybe attach a copy of Schedule A.)

Since you're sending it separately you should sign the 5329.

Bill

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113900 of 121061
Subject: Re: 401k withdrawal Date: 9/2/2011 11:33 PM
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Some of those exceptions to the 10% penalty are specific to IRAs only, but I don't think that's one, as I read it.

You're correct, as confirmed by Pub 575. For lurkers, the problem arose because OP didn't file the 5329 with the return in question. The IRS has no way of knowing the distribution qualified for the penalty exception if the taxpayer doesn't tell them.

Phil
Rule Your Retirement Home Fool

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113901 of 121061
Subject: Re: 401k withdrawal Date: 9/3/2011 8:11 AM
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I don't think that's right, Ira. Some of those exceptions to the 10% penalty are specific to IRAs only, but I don't think that's one, as I read it.

Reminder to self: Check before firing from the hip.

Thanks, Bill.

Ira

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