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When an IRA is withdrawn early, a 10% penalty usually applies, but there’s an exception for amounts used to pay medical expenses.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.