10% penalty

[mimi]

My client withdrew from his IRA in January 2010. He was deemed disabled in Aug 2010 by SSA. Does he qualify for the exception to the 10% penalty even though he withdrew the money before being officially declared disabled?

[TaxmannEA]

He doesn't need to be "officially" disabled. A doctor's letter certifying that he was permanently disabled will also suffice.

[mimi]

Thank you for your reply. I am aware of the doctor's note option. My question is can the exception be applied if the client took the withdrawal first (Jan) and was later declared disabled (Sept). The pubs state "distribution taken DUE TO disability", so was wondering if it made a difference which came first.

[grandmabee]

why did they take the distrubtion in January?

[kcjenkins]

Assuming he took it in Jan because he was disabled and not working, yes, he can use the exception. It normally takes some time to get it 'official', so if he got that in Aug he was probably disabled before the end of 2009. I know it took 11 months for my husband, although the doctors had stated it even before that. He had his handicap tags for the car over a year before the 'official' ruling by SSA.

Of course, if he took it out to buy a speedboat in Jan, while still working, and then got hit by a bus and disabled in March, that's a different situation. :dunno:

[mimi]

why did they take the distrubtion in January?

I clarified this with client today. Had health issues related to an accident around Sept 2009. Was reinjured by another accident. Was terminated by employer in Dec '09. Employer was fighting unemployment, and client found out employer had cancelled his health insurance in Oct 2009. He took the distribution to pay bills while dealing with health issues that progressively became worse as the year went on. I don't think the client realized at that time that the health issues would progress and lead to disability.

[TAXBILLY]

Exception 05 on Form 5329 might also apply.

taxbilly