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I have a relative -- let's call her K -- who has been unemployed for a long time. As she left her last job, she rolled her 401k to an IRA. She is younger than 59 1/2 and has had to take some money out of the IRA to pay expenses. We assumed that this would be subject to taxes as well as the 10% penalty. Then I read thru IRS topic 557 and saw this:
There are exceptions to this 10% additional tax for early distributions that are:
- Not in excess of certain medical insurance premiums paid while unemployed

And from IRS pub 590

Medical insurance. Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.

- You lost your job.
- You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
- You receive the distributions during either the year you received the unemployment compensation or the following year.
- You receive the distributions no later than 60 days after you have been reemployed.

There is an additional exception for medical expenses (as opposed to premiums) for expenses over 7.5% of AGI. The premium case is more relevant for K.

Does anyone have experience with this or hear of someone doing this type of withdrawal exception?
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