Under HIPAA, the 10% excise tax on an early IRA withdrawal is not applied if the withdrawal is used to cover medical expenses exceeding what percentage of the individual's adjusted gross income?

Under HIPAA, the 10% excise tax on an early IRA withdrawal is not applied if the withdrawal is used to cover medical expenses exceeding what percentage of the individual's adjusted gross income?

• A. 10%
• B. 5%
• C. 7.5%
• D. 15%

Answer: (C)

When an IRA is withdrawn early, a 10% penalty usually applies, but there’s an exception for amounts used to pay medical expenses. The exemption applies to the portion of the medical expenses that exceed 7.5% of the individual’s adjusted gross income. In other words, if medical costs are higher than 7.5% of AGI, the amount above that threshold can be taken without the 10% penalty. Therefore, the threshold percentage is 7.5% of AGI. For example, with an AGI of $60,000, 7.5% is $4,500; medical expenses above $4,500 would be eligible for the penalty exemption. The other percentages listed aren’t the threshold used for this rule.

When an IRA is withdrawn early, a 10% penalty usually applies, but there’s an exception for amounts used to pay medical expenses. The exemption applies to the portion of the medical expenses that exceed 7.5% of the individual’s adjusted gross income. In other words, if medical costs are higher than 7.5% of AGI, the amount above that threshold can be taken without the 10% penalty. Therefore, the threshold percentage is 7.5% of AGI. For example, with an AGI of $60,000, 7.5% is $4,500; medical expenses above $4,500 would be eligible for the penalty exemption. The other percentages listed aren’t the threshold used for this rule.