How to Pay Health Insurance Premiums With a 401(k)

You can use your 401(k) or another type of retirement plan to pay health insurance premiums without a 10 percent penalty tax if you are unemployed. Another option is to designate a percentage of your retirement plan contributions toward retiree health care premiums, but keep in mind this type of plan is ineligible to receive tax breaks.

Instructions

1. Understand that a withdrawal from a 401(k) plan is taxable, but unemployment qualifies as a special situation that allows you to escape a 10 percent penalty tax for premature withdrawals if you are using the distribution to pay for health insurance premiums.

2. Meet with a tax professional to discuss the details of using a 401(k) plan to pay for health insurance premiums. The tax rules associated with this type of situation are complex and special limitations apply.

3. Arrange a rollover of your 401(k) to an IRA before taking the distribution to pay for health insurance premiums. The exemption from a 10 percent penalty tax is only applicable if it is an IRA distribution.

4. Complete IRS form 5329 to report the withdrawal from your IRA and the exemption from the penalty tax. You must receive unemployment compensation for a minimum of 12 weeks and make the withdrawal from your IRA within a year of or the year following your unemployment to qualify for the exemption.

5. Talk to your employer to determine if you are eligible to use up to 25 percent of your contributions toward your 401(k) plan to pay for retiree health care premiums, as you must meet certain conditions. If eligible, elect for a direct transfer of your contributions to an insurer.