IRA Distributions for Medical Expenses: Penalty Exception and Form 5329

If you pull money from an IRA before age 59½ to cover medical bills, the IRA early withdrawal penalty exception for medical expenses can wipe out the 10% additional tax, but only on the portion of your unreimbursed medical expenses that exceeds 7.5% of your adjusted gross income for that same year.¹ The distribution itself is still ordinary taxable income from a traditional IRA. The exception only removes the penalty, and the 7.5% floor is where most people miscalculate what they’ll actually save.

How Much of Your Withdrawal Escapes the Penalty

Under IRC Section 72(t)(2)(B), the penalty-free amount equals your unreimbursed qualifying medical expenses paid during the year, minus 7.5% of your AGI.¹ Anything below that floor stays subject to the full 10% penalty. You do not have to itemize deductions to claim the exception.²

A worked example. Your AGI for the year is $100,000, and you paid $15,000 in unreimbursed medical expenses:

7.5% of AGI: $7,500
Penalty-free amount: $15,000 − $7,500 = $7,500

If you withdrew $15,000 from the IRA, only $7,500 escapes the 10% penalty. The remaining $7,500 gets hit with a $750 penalty. And the full $15,000 is still included in your ordinary taxable income.

There’s a circular effect people miss. A traditional IRA distribution is itself included in AGI, which raises the 7.5% floor, which shrinks your penalty-free amount. If your AGI without the IRA money was $85,000 and you take $15,000 out, your AGI becomes $100,000 and the floor climbs with it. If you’re near the threshold, sizing the distribution carefully makes a real difference.

What Counts as a Qualifying Medical Expense

The exception uses the same definition of qualifying medical expenses as the Section 213 itemized deduction: the expense must be primarily to prevent or treat a physical or mental illness.³ Doctors, dentists, hospitals, prescription drugs, and nursing care all qualify. So do premiums for qualified long-term care insurance, subject to age-based limits.

Some less obvious categories also count:

Transportation to medical appointments (2026 IRS medical mileage rate: 20.5 cents per mile), plus parking and tolls.⁴
Lodging while traveling for treatment, capped at $50 per night per person (a parent accompanying a sick child can include both, bringing the cap to $100). Meals are not included.⁵
Home modifications for medical reasons like ramps, grab bars, or widened doorways. If the modification raises your home’s value, only the excess cost counts; if it doesn’t, the full cost qualifies.⁵
Nutritional counseling or supplements when prescribed by a physician for a specific diagnosed condition, not for general wellness.³

Cosmetic surgery generally doesn’t qualify unless it corrects a congenital abnormality, an injury from an accident or trauma, or a disfiguring disease.⁶ Over-the-counter vitamins for general health, gym memberships, and funeral expenses are excluded.³

Same-Year Timing and No Double-Dipping

Two rules trip people up more than the expense list itself. First, the medical expenses have to be paid in the same tax year as the IRA distribution. Pulling money out in January to pay a bill from the prior December disqualifies that spending. Second, only expenses you actually paid out of pocket qualify. Anything reimbursed by insurance, an HSA, or an FSA is off the table.⁷ If your HSA covered $5,000 of a $15,000 bill, only $10,000 counts toward the exception calculation.

Health Insurance Premiums During Unemployment: A Separate, Better Rule

If you’re paying for health insurance while unemployed, there’s a companion exception with no AGI floor. Under IRC Section 72(t)(2)(D), if you’ve received unemployment compensation for at least 12 consecutive weeks, IRA distributions used to pay health insurance premiums for you, your spouse, and your dependents are penalty-free dollar for dollar.⁸

The distribution has to happen in the year you received unemployment compensation or the following year.
The penalty-free amount can’t exceed premiums you actually paid.
The exception stops once you’ve been re-employed for at least 60 days.⁸
Self-employed individuals who would have qualified for unemployment but for their self-employment can be treated as meeting the unemployment requirement.

This rule applies to IRAs, SEP IRAs, and SIMPLE IRAs. It does not apply to 401(k)s or other employer plans.⁹

Roth IRAs: The Exception Rarely Comes Into Play

Roth IRA distributions follow ordering rules. Your own contributions come out first, tax-free and penalty-free with no exception needed. Conversions come out next, and earnings come out last.¹⁰ The medical expense exception only matters if you’ve already withdrawn all your contributions and conversions and are pulling out earnings before 59½ (or before the account has met the five-year aging rule). In that narrow case, the earnings piece gets the same 7.5%-of-AGI treatment as a traditional IRA distribution. For most Roth holders, the situation never arises.

Reporting the Exception on Form 5329

Your IRA custodian reports the distribution on Form 1099-R with Distribution Code 1 (early distribution, no known exception) in Box 7, even if you told them the money was for medical bills. Custodians can’t verify the exception, so the IRS instructions require Code 1.¹¹ Claiming the exception is entirely on you, through Form 5329.

Line 1: total taxable amount of the early distribution.
Line 2: the portion qualifying for the exception (unreimbursed medical expenses minus 7.5% of AGI). Enter exception number 05 in the space provided.¹²
The 10% penalty is then calculated only on the difference between Line 1 and Line 2.

File Form 5329 with your Form 1040 by the return’s due date, including extensions. Skip the form and the IRS will assess the full 10% penalty automatically based on the Code 1 on your 1099-R, leaving you to fight it after the fact.¹²

Records to Keep

You don’t attach medical records to your return, but keep them in case the IRS asks. Save receipts and invoices showing the date of service, provider, and amount paid; Explanation of Benefits statements from insurers showing what you paid out of pocket; and bank statements or canceled checks that prove when you paid. The same-year timing rule is one of the first things the IRS checks.¹³ Without documentation, the exception can be disallowed and the full penalty assessed with interest.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) – Section: Exceptions
3
Internal Revenue Service. Frequently Asked Questions About Medical Expenses Related to Nutrition, Wellness and General Health
4
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
5
Internal Revenue Service. Publication 502, Medical and Dental Expenses
6
Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses
7
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
8
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
11
Internal Revenue Service. Instructions for Forms 1099-R and 5498 – Section: Box 7 Distribution Codes
12
Internal Revenue Service. 2025 Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
13
Internal Revenue Service. Publication 502, Medical and Dental Expenses – Section: Recordkeeping