10% Penalty from IRA
A 56 year old man is retiring due to medical disability. Is currently applying for total disability to Social Security. Has a pension plan and 401K. Will need to pull money for expenses. My understanding he can pull from plan before rolling over to IRA and not incurr a 10% penalty. I read in Ed Slotts 2 day workshop due to disability the family can be provided for and not incurr penalty however he is single. My question will he be hit with 10% penalty if we rollover pension and 401K into an IRA and he needs income from the IRA before 59 1/2?
Permalink Submitted by mk foss on Mon, 2010-09-27 17:41
The exception from the 10% penalty on early retirement withdrawals applies to IRAs as well as qualified plans. The individual should tell the custodian that it is due to a disability so that Form 1099R is coded correctly. If the 1099R does not indicate the proper code (it should be 3), the 10% penalty can still be avoided by attaching Form 5329 to the tax return and indicating that the distribution is for disabilty.
It doesn’t matter that the individual is single either. The IRS has a very strict definition of disability – stricter even than the Social Security Administration, but if he’s really disabled there should be no problem. Of course the distributions are taxable, you only avoid penalties.
Permalink Submitted by Kevin Asano on Thu, 2010-10-14 21:57
Thank you Mary,
Where can we go to see the IRS definition of disability? My client has Hemoplegic Cereberol Pulsy and wants to withdraw from his IRA. Is there a limit to the amount he can withdraw or can he do the whole thing?
Permalink Submitted by Alan Spross on Thu, 2010-10-14 23:01
The disability definition is stated in Sec 72(m)(7), copied below:
>>>>>>>>>>>>>>>>>>>>>
72(m)(7) Meaning of disabled
For purposes of this section, an individual shall be considered
to be 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 indefinite duration. An individual
shall not be considered to be disabled unless he furnishes proof
of the existence thereof in such form and manner as the Secretary
may require.
>>>>>>>>>>>>>>>>>>>
There is no limit on the amount he can withdraw. If he meets the definition above, there will be no penalty, but he will still owe ordinary income taxes. Accordingly, this late in the year he should probably split the distribution between 2010 and January 2011 as that may well reduce the ordinary tax bill.