Taxpayer M, age 50, withdrew $10,000 from a traditional IRA in the current year to pay for unreimbursed medical expenses that exceeded 7.5% of AGI. M has not met any other exception. What is the tax treatment?

Answer options:

Subject to income tax and 10% penalty.

Subject to income tax but exempt from 10% penalty.

Exempt from income tax and 10% penalty.

Subject to 10% penalty but exempt from income tax.

How to approach this question

Recall IRA Penalty Exceptions (HIM DEAD: Home, Insurance, Medical, Disability, Education, Adoption, Death). Medical is an exception.

Full Answer

B.Subject to income tax but exempt from 10% penalty.✓ Correct

Withdrawals from a traditional IRA are subject to ordinary income tax. Generally, a 10% penalty applies if under age 59.5. However, an exception exists for medical expenses in excess of the AGI floor (7.5%). Therefore, M pays tax but no penalty.

Common mistakes

Thinking the exception makes the withdrawal tax-free (it only waives the penalty).

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