Disability Exception to the 10% Early Distribution Penalty | Ed Slott and Company, LLC

Disability Exception to the 10% Early Distribution Penalty

You are not yet 59 1/2 and have become disabled. You want to take funds out of your IRA. Can you escape the 10% early distribution penalty?

The answer is a definite maybe. The fact that someone, somewhere, has classified you as disabled does not mean that you are exempt from the penalty. IRS has its own definition of disabled and it is pretty much the same definition as the Social Security definition.

The following comes from IRS Publication 590: “You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.”

That’s a pretty strong definition of disabled and will disqualify many individuals currently considered disabled by their employers, insurance companies, and even by Social Security. This is a definition that has stood up to court tests when IRS has assessed the penalty and the taxpayer chose to go to court rather than pay up.

If there is any question that you can meet that definition, try using another exception to the penalty, if you qualify.
 


By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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