IRAs and Unemployment

Today TaxMama® hears from Stevenson in the TaxQuips Forum, with this question.  “If you are unemployed, can the
penalty to withdraw money from your IRA be waived when filing taxes? However, the taxes will still need to be paid since I am not 59 1/2. Is this correct?  What form or forms would I file if I worked 6 months last year and was not working the other 6 months of last year?
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Dear Stevenson,

Unfortunately, you don’t have a blank check to draw money out of your IRA without penalty just because you’re unemployed.

I have proposed this change to the IRS and to the Taxpayer Advocate (who makes suggestions to Congress), since SO many people have now become unemployed in the last few years, often due to the really bad legislation and oversight of Congress. Like, you, many folks have had no choice but to tap into their retirement accounts to survive.
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Alas, this legislation has not happened. So, the only tax penalty avoidance you have are the following (See instructions to Form 5329 page 3):

#7 – IRA distributions made to unemployed individuals for health insurance premiums.
#5 – Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 10% (7.5% if over 65) of your adjusted gross income for the year.

Naturally, if you cannot afford to pay the taxes, you can get an installment agreement to pay them over time, or you might qualify for an offer in compromise.

Incidentally, you must always pay taxes on the regular IRA withdrawals – even after age 59 1/2. It’s only the penalties you get to avoid.
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