How to Pay Emergency Family Medical Expenses With Your Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: November 29, 2018)

For many Americans, being able to manage their family’s medical expenses is a significant financial concern. And this has been a growing issue for many years. In inflation-adjusted terms, total national health care expenditures have grown 818% since 1960, while inflation-adjusted wages have only grown 16%.

Adding to these financial challenges is the fact that our medical expenses are largely unpredictable. Medical emergencies and unexpected injuries and illnesses occur, and they often cause big financial problems. In some cases, families will turn to their single biggest asset for financial help – their retirement nest egg. Here are some steps for using your self-directed IRA to pay for those emergency family medical expenses.

Avoid Early Withdrawal Expenses. Depending on your financial situation, you may be able to use funds from your self-directed IRA without having to pay early withdrawal penalties. Recall that any time you take money out of a self-directed IRA prior to reaching age 59½ the amount of withdrawal will be subject to a 10% penalty (in addition to any taxes that may be due), unless an exception applies. The most relevant exception here is for certain qualified medical expenses. (If your self-directed Roth IRA is old enough, you may also be able to withdraw your original contributions, but not any earnings, on a tax-free basis as well.)

In order to qualify, the withdrawal can only cover that portion of the medical expenses that exceed 10% of the account holder’s adjusted gross income for that year (or 7.5% for account holders age 65 and older).

Disability. If the injury or illness that results in significant family medical expenses also results in a permanent mental or physical disability, you may be eligible for penalty free withdrawals from your account. A physician must determine that the disability exists, that it prevents you from engaging in gainful employment, and it must be one that is either likely to result in death or continue on for an indefinite period.

Stay Adequately Insured. One key way to stay financially healthy in the case of large medical expenses is to maintain adequate health insurance. Obviously the insurance markets are always changing (and even more so over the past few years), but having health insurance provides you with a strong measure of financial security. If you lose your job and receive unemployment compensation for 12 consecutive weeks as a result, then you are eligible to make penalty-free withdrawals from your self-directed IRA in order to pay for health insurance for yourself and your family.

The decision to withdraw funds early from your self directed IRA should not be undertaken lightly. Even if you can do so without incurring the 10% penalty, the withdrawal can still end up costing you. Once the money is out of your account you will be able to pay it back in, so you will forever lose out on the tax-advantaged growth opportunities that they self-directed IRA provides. It can be a comfort to know that you have those funds available if you truly need them, but they should be thought of as your last financial resort for emergency medical expenses.

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