Question: Jesse is 53 and has been working with his current employer for 30 years. He has $450,000 in his §401(k) account and all his contributions were made with pre-tax dollars. In July 2023, Jesse took a distribution of $40,000 from his §401(k) account to pay for surgery and medical expenses for himself due to a medical condition. Will Jesse pay the 10% penalty associated with an early distribution?
Answer: No. If a taxpayer takes distributions from a qualified §401(k) plan prior to age 59½, they will be subject to a 10% early distribution penalty. However, the penalty does not apply to distributions made in some situations. Under §72(t)(2)(B), distributions made to pay for medical expenses in the same year they are incurred is one of the situations that qualifies as an exception to the 10% early distribution penalty. Jesse would file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to except the distribution from the early withdrawal penalty.
The §72(t)(2)(B) exception is limited to expenses that are allowable medical expenses under §213and can’t have been reimbursed by an insurance company. Jesse does not have to itemize deductions to take advantage of this exception as long as his medical expenses exceed 7.5% of adjusted gross income.
