401K distribution

[Guest sethf123]

I closed a 401K from an old company and took all the money for hardship before the required age...therefore a penalty.

401 K withheld 20% for taxes.

Now I do my tax returns and I'm getting back the 10% withheld for taxes...I had an ordinary loss for the year...and don't have to pay any taxes...Is there any way I can get the 10% penalty back as well?

What qualifies me to not pay the 10% penalty?

Thanks!

[Mary Kay Foss]

The 10% penalty does not apply if the funds withdrawn are used for medical expenses that exceed 7-1/2% of your adjusted gross income. The penalty also does not apply if the funds are used to pay medical insurance premiums for an unemployed person.

Disability is another reason that the 10% penalty is waived, but the disability must be so severe that no further work is possible based upon a medical determination.

There are other exceptions that apply to IRAs only (first time home buyer and higher education).

[Guest sethf123]

Thanks. My AGI was Zero...negative actually.

I was self-employed and had both medical expenses and premiums, and my AGI is still zero without those expenses. Seems like I should get a dollar for dollar reduction of taxes for the medical.

When I add the medical in on schedule a, my tax software (taxcut) doesn't account for this.

Am I doing something wrong, or do I just need to manually override?

[Mary Kay Foss]

You don't have to actually itemize deductions to qualify for the exception to the 10% penalty; you just have to indicate on Form 5329 that your medical expenses exceed 7.5% (and be able to prove it if Uncle Sam ever asks).