Taxpayer asks:
Last year, I cashed in my IRA to pay off some doctor bills. I lost my job and couldn’t pay but I did have my IRA so I used that to pay. I used the whole thing. Last month, I got a 1099 that says that it is all taxable. Please help because I thought it was not taxed if you use it to pay the hospital. Thank you.
Taxgirl says:
Unfortunately, I have bad news for you. Amounts you withdraw from a traditional IRA are generally taxable in the year you withdraw them, no matter what the reason for the withdrawal. If your IRA was made up entirely of deductible contributions (true for most taxpayers), then withdrawals are completely taxable.
And it might be even worse. If you’re under age 59 1/2, you may be subject to a 10% additional tax. There are a few exceptions to the additional tax rule – and that might be where your confusion started. You can avoid the 10% additional tax if your IRA withdrawals are equal to or less than your deductible medical expenses (those medical expenses that are more than 7.5% of your AGI). You don’t have to actually itemize on your return to meet this exception.
But there’s no exception for medical expenses that would allow you to escape taxation of your entire IRA. Sorry.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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{ 3 comments… read them below or add one }
A lot of people are confuse whether their individual retirement account (IRA) with the other type of investments. Generally all distributions from IRA are fully taxable.Individual retirement accounts are usually created from tax-deducted contributions to the account. Hence, that is why all distributions are taxable. Only if you chose to make nondeductible contributions to the IRA would you recover some of the distribution tax-free.
On the other hand, if your medical bills were high enough, you should be able to itemize that. Might at least help some.
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