South Carolina Life and Health Practice Exam

What percentage of an individual's adjusted gross income does the 10% excise tax exemption apply to for early withdrawals from an IRA used for medical expenses?

1. 5%

2. 7.5%

3. 10%

4. 12%

The correct answer is: 7.5%

The excise tax exemption for early withdrawals from an Individual Retirement Account (IRA) used for qualified medical expenses is specifically tied to a certain percentage of an individual's adjusted gross income (AGI). In this context, the correct percentage is 7.5%. When an individual withdraws funds from their IRA before the age of 59½ to cover unreimbursed medical expenses, they can do so without incurring the 10% penalty, provided that these expenses exceed 7.5% of their AGI. This is an important distinction because the exemption helps relieve the financial burden of significant medical expenses by allowing individuals to access their retirement funds without facing a penalty, as long as the ratio is met. Using funds from an IRA for medical expenses can provide critical financial support if the costs are substantial, helping individuals maintain their financial health without facing penalties that typically accompany early withdrawals.