Used IRA distributions to pay for COBRA premiums

When you enter the 1099-R, turbotax will ask if you have any special situations that qualify for a penalty exception. 

The early withdrawal form your IRA to pay for medical insurance premiums while unemployed is one of the exemptions from the early withdrawal penalty.

Please read this TurboTax Help article for more information.

In TurboTax, please follow these steps:

1. After you have entered all your forms 1099-R, on the summary page Review your 1099-R Info, click Continue 
2. Follow the interview until you arrive at the page titled Did you use your IRA to pay for any of these expenses?
3. Enter the amount of your Cobra premiums in the box next to Health insurance premiums while unemployed and click Continue
4. Your early withdrawal penalty will be waived.

I do not see this listed- I see medical insurance but nothing regarding medical premiums.

Correction I see medical expenses but not medical premiums

Medical insurance premiums are medical expenses.  https://www.irs.gov/pub/irs-pdf/p502.pdf

@ashutoshsharmaindia , look at this chart.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

The bottom item says "medical insurance you paid for while unemployed, if you were unemployed for at least 12 weeks".  In the middle, there are two listings under Medical.  One says, "health insurance premiums paid while unemployed".  (I'm curious about why there are two different rules for medical insurance premiums that are basically the same but slightly different, I guess Congress was just mucking around with the tax code one day.)

However, also under medical it says "amount of unreimbursed medical expenses (>7.5% AGI)."

What this means is that money you withdrew to pay premiums is exempt from the penalty, but money you withdrew to pay other medical expenses (like prescriptions and co-pays) are only exempt after your total medical expenses exceed the 7.5% AGI threshold.   I presume Turbotax asks the right questions to figure this out. 

Problem is turbotax's quality has degraded. It is not asking right questions at right place.

Medical premiums paid is totally different than medical expenses(which has > 7.5% AGI test).

I checked with Turbo tax expert. If the 1099-R has 2 code then nothing else is needed out here.

IRS is not checking it any further. It all depends how the company(which holds your IRA) described in the 1099-R

I am trying to take this exemption but Turbo tax never asks me this question.  It asks me many other questions about the IRA but not what I did with the distribution.  Is there a way to go directly to this question?

@jbillz   Are you over 59 1/2?  The exceptions are only if you have the 10% Early Withdrawal Penalty for under 59 1/2.  

No I'm not.  Any other ideas?

It asked me lots of questions about my Basis and the existence of the IRA before 2019.  Perhaps that caused it to skip the questions.  I'm wondering if there is a way to make an adjustment directly to a Form where the IRA withdrawal penalty appears but I can't find it. 

Oh, what is the Code in box 7 on your 1099R?  It may be coded as an exception to the 10% Early Withdrawal Penalty.  @dmertz 

Assuming no basis in nondeductible traditional IRA contributions, any part of the distribution not rolled over to a traditional qualified retirement account is taxable income.  The only question is whether or not that distribution is subject to an early distribution penalty.  If you are using the online version of TurboTax, you can go directly to Other Tax Situations -> See all uncommon tax situations -> Additional Tax Payments -> Extra Tax on Early Retirement Withdrawals.

Thank you - I think this is the issue. This is the code on the 1099-R.

Early distribution from a Roth IRA, no known exception (in most cases, under age 59

Hi - It should not be subject to the deductible because I was unemployed and used it for healthcare expenses.  

So my question is how do I clarify that this distribution should be exempt from the penalty in my Tax forms. 

I'm using TurboTax Desktop so not sure where to adjust this.  The smart survey seems to skip the questions about this, I believe because of the code on my 1099-R.   See my earlier response. 

Thank you!

Since you have an IRA distribution coded with no known exception, you are trying to avoid the penalty for the early withdrawal. The penalty is figured on form 5329. Look in your forms list and see if it is showing. If it isn't, you can open the form.

See About Form 5329, Additional Taxes on Qualified Plans - IRS

@jbillz 

"Roth IRA"

Is this a Roth IRA?  If yes, then the following information is important.  If it is not a Roth IRA, you need a corrected 1099-R.  (What are the actual letter and number codes?  It should be J or maybe J7.)

When you withdraw from a Roth IRA, you always withdraw contributions first, then conversions, then earnings last.  Withdrawal of contributions is always tax-free, no exception is required.  Withdrawal of conversions is subject to a 10% penalty if it is less than 5 years since the conversion event.  Withdrawal of earnings is subject to income tax plus a 10% penalty if you are under age 59-1/2 or the Roth has been open less than 5 years.  

Suppose your current Roth balance is $50,000.  Over the years, you contributed $30,000 and never taken a withdrawal before or done a conversion.  That means you have $30,000 of contributions and $20,000 of earnings.  If you withdraw less than $30,000, you are only withdrawing contributions and it is all tax free.  No special reason or exception is required.  If you withdrew $40,000, then $30,000 is tax-free and the $10,000 of earnings is subject to income tax plus a 10% penalty if you are under age 59-1/2.  You could apply the COBRA exception to the 10% penalty on the $10,000 withdrawal of earnings.  

However, turbotax does not know what your contributions, earnings, and conversions are, you have to tell the program.   If you enter a 1099-R with code J, you should be asked by the program, how much have you previously contributed, how much have you previously converted, and how much have you previously withdrawn.  If you answer those questions correctly, the correct tax will be calculated.  But only you have those records, and you are required to keep those records to prove your claims in case you are audited.

This is very helpful, thank you so much. 

1. - Yes it is a Roth and the code is J.  The Roth is more than 5 years old
2. - All the funds were contributions, not conversions.  I went through that part of the interview.
3. - I am 54 so I am withdrawing early.  

Based on your note it sounds like this withdrawal should not be subject to income tax since it's 100% contributions.  

However, because I'm withdrawing early (before 59-1/2) I am subject to the 10% penalty or is that waived too?   I just went back through the 1040 and Schedules I don't think it's charging me the 10% penalty after all. 

Thanks again.

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@jbillz wrote:

This is very helpful, thank you so much. 

1. - Yes it is a Roth and the code is J.  The Roth is more than 5 years old
2. - All the funds were contributions, not conversions.  I went through that part of the interview.
3. - I am 54 so I am withdrawing early.  

Based on your note it sounds like this withdrawal should not be subject to income tax since it's 100% contributions.  

However, because I'm withdrawing early (before 59-1/2) I am subject to the 10% penalty or is that waived too?   I just went back through the 1040 and Schedules I don't think it's charging me the 10% penalty after all. 

 

Thanks again.

 

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Withdrawal of original contributions is never subject to income tax or the 10% penalty, regardless of your age or how old the Roth IRA is.  Penalties and taxes only apply to withdrawal of conversions and earnings, and then it depends on the exact circumstances.