Unpenalized Expenses

• You can withdraw money from your Individual Retirement Account penalty free when it is used to pay for qualified medical expenses that exceed 7.5 percent of your adjusted gross income. This means the amount you can withdraw will vary each year, if any. For example, if you have an adjusted gross income of $45,000 and you had $5,000 in medical expenses, you would be able to take out $1,625 without penalty. However, if your medical expenses were only $3,000, you would not be able to take out any money without penalty.
  
  

Qualified Medical Expenses

• Qualified medical expenses include the costs of medical, dental or vision care. Care can include prevention and treatment such as annual checkups, seeing specialists and surgery. They also include the cost of prescription drugs and insulin, but not the costs of other nonprescription drugs. The costs can be paid for yourself, your spouse or your dependents. In addition, the medical expenses must be paid out of pocket and cannot be reimbursed.
  
  

Tax Reporting

• After taking an early distribution from your IRA for medical expenses, you must complete Form 5329. This form shows the IRS either your calculations for your early withdrawal penalty, or in the case that you have a qualified excuse like medical expenses, your reason for the exemption. On the form, note the amount you can claim as exempt on Line 2 and next to Line 2, write "05," the code for medical expenses.
  
  

Considerations

• Even though you can take money out of your IRA without penalty for the medical expenses exceeding 7.5 percent of your adjusted gross income, you must still pay income taxes on the distribution. The amount of the tax bill varies depending on your income tax bracket. The distribution is treated as ordinary income; the IRS does not have a special income tax rate for IRA withdrawals. In addition, any amount that you take out in excess of your allowed amount will be subject to an additional 10 percent early withdrawal penalty.