How to Use an IRA for a Health Insurance Premium

You’ll need health care sooner or later, so paying your health insurance is a top priority. If you find yourself in a tight financial spot, finding the money to keep up with your premiums might be tough. If you get really desperate, you can tap the money in your IRA.

Normally, the funds in an IRA are supposed to stay there until you are 59 1/2. The Internal Revenue Service imposes some stiff penalties for early withdrawals. Under some circumstances, however, IRS rules do allow you to use an IRA to pay health insurance premiums without penalty, although the money you use may be considered taxable income.

You can use your IRA to pay health insurance premiums if you lose your job. The IRS waives the penalty tax for money you take out of an IRA for this purpose as long as you receive state or federal unemployment compensation for at least 12 consecutive weeks. You have to withdraw the money the year you get unemployment benefits or the following year, but no more than 60 days after you start working again. You do have to report the money you withdraw from the IRA on your tax return and pay income tax on it, but you won’t have to pay any penalty tax.

You can also take out money you’ve recently contributed to a traditional IRA to pay your health insurance premiums if you are short on cash but haven’t lost your job and received unemployment benefits. You can remove money contributed to a traditional IRA during the current year at any time up until the date your income tax is due the following year, and the IRS will pretend you never put the money in the account to start with. You can’t use the contributions you take out as a tax deduction, but you won’t have to pay any extra tax or penalties.

Withdraw money you’ve contributed to a Roth IRA at any time. Since you can’t get a tax deduction for contributions made to a Roth IRA, the IRS lets you take the contributed funds out whenever you like, and the withdrawal is not subject to income taxes or penalties. The IRS uses a set of ordering rules to decide if the money you take out of a Roth is considered contributions, rollover funds or earnings. According to the ordering rules, as long as the amount you take out is less than the amount you’ve contributed to the account since you opened it, the withdrawal is considered contributed funds.

If you have medical expenses not covered by your health insurance during a single year that are more than 7.5 percent of your adjusted gross income for that year, you may use IRA money to pay the amount over and above 7.5 percent of your AGI. You won’t have to pay the penalty tax, but you will owe income taxes on money you remove from an IRA for this purpose.