COBRA premiums - mechanism to pay for with pre-tax retirement money (not taking as current year income), without triggering 10% early withdrawal penalty?

[TaxNoviceLearner]

My TurboTax friends,

Is there a way for me to pay for my COBRA premiums with pre-tax retirement dollars without taking that amount as income for that tax year?  And no 10% early withdrawal penalty.  And without having to Itemize Deductions (>7.5% AGI 2019, >10% AGI 2020).

Situation:

* Unemployed, have already received 12 weeks of unemployment benefits.

* I have some 401(k) accounts.  I don't have a Traditional IRA, but could roll 401(k) money into one, if needed.

* Paid first self-paid COBRA payment in Dec19.  Prior COBRA payments were covered as a part of severance.  I'm still paying for COBRA out of pocket in tax year 2020.

* I don't want to take a hardship withdrawal from a 401(k) and I don't know if my it'd qualify for it.

* I'm <59.5 years old.

I understand that I could roll some 401(k) money into a Traditional IRA and take a distribution from the Traditional IRA without the 10% early withdrawal penalty, but I'm trying to find a mechanism to pay these premiums with pre-tax money, just as I paid my health insurance premiums with pre-tax money with my old employer.

Thanks!

[TaxNoviceLearner]

And I have a historical HSA, but it's zeroed-out and I cannot contribute any more money to in to 2019 or 2020, as I am/was not part of a HDHP.

[BillM223 · Accepted solution]

When you take money from a retirement account, it will appear as income - there really isn't a way around that.

The only workaround I can think of is taking a loan from your 401(k) plan to pay for the premiums (the loan is not taxable to you as income).

However, since you are no longer an employee, I don't know if you would qualify for one in your plan (you would have to ask). This also presents the difficulty of paying the loan back, because if you can't, you default on the loan and the entire amount becomes taxable to you.

Hmmn, there is another possibility, depending on your age and job:

"Separation from Service

the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)** " See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

Any chance you are 55+ or 50+(if a public safety worker)? If so, you could take the distribution directly from the 401(k) plan with no early distribution penalty.

If not, you have already identified the next best option: rollover an amount from your 401(k) plan to an IRA and take the distribution from the IRA. 

[TaxNoviceLearner]

Thanks, @BillM223.  You rock!

I appreciate you taking the time to walk me through this.  Unfortunately/fortunately, I don't qualify for either alternate scenario.  I'll take a look into a 401(k) loan.  It may be simpler to take it as income [401(k) to IRA to pay premiums] this year, in a down income year.

Thanks again!