Do you plan to raid your retirement plan early? If you use the money for medical payments, you can avoid the usual 10 percent penalty tax on early withdrawals. One key caveat: Make sure you withdraw the funds in the same year you pay the medical expenses. New case: A taxpayer withdrew money in the year before she actually paid the medical bills. Because of the year separation, the IRS slapped her with the 10 percent penalty. (Kimball, TC Summ. 2004-2)
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