IRA definition of disability vs. Social Security
Client, age 30, began receiving Social Security disability payments in January 2007. She will qualify for Medicare in 2 years, in the meantime she has no health care insurance. She has an IRA containing $30,000. She is the owner of the IRA – the source of the contributions was a job she held in a school cafeteria. The assets in the IRA prevent her from qualifying for other state benefits so “spending down” the assets to qualify may be the way to go.
She wishes to access the IRA to pay for her medical bills. The definition of disabillity for purposes of Social Security is not the same as the definition of disability for purposes of the exception to the 10% excise tax on early withdrawals. I have read some commentators state that qualifying for SS disability payments makes it “apparent” that you qualify for the Section 72(m)(7) exception. I am not sure it is that clear.
Given the amount of money involved, it may make more sense for the client to rely on the exception to the excise tax for health care expenses in excess of the 7.5% of AGI threshold than go through the hassle of complying with Section 72(m)(7) and defending the position if the IRS challenges it.
Any thoughts?
Permalink Submitted by Alan Spross on Wed, 2007-08-01 03:20
Each disability decision is somewhat subjective and based on possibly different facts and circumstances. This is what the tax court stated in Dwyer v Comm. in 1996:
“For purposes of this rule, an individual is considered disabled if “he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and infinite duration.” The Code specifies that an individual must be able to furnish proof of his disability in whatever form and manner that the Service may require. The court noted that the regulations under Section 72 also state that an impairment that is remediable does not constitute a disability. ”
Might as well claim the disability exception to avoid the penalty on the 7.5% AGI amount. But if a problem (perhaps injury is remediable) she can fall back on the medical expenses if the distribution and payment of those costs are appropriately timed. At her age, seems like she would end up on Medicaid rather than Medicare, and sooner. Further, the 7.5% of AGI figure should not be much, but might be reduced further by considering the lump sum election if many months of back benefits were paid this year.
Permalink Submitted by [email protected] on Wed, 2007-08-01 14:56
It may also depend (somewhat) on what the custiodian requires to code the distributions in Box 7 as a “3” (Disabilty exception). Even though this does not dictate the IRS treatment, they may very well not pursue it.