59 1/2 10% penalty exceptions for disability on annuities?
I have a client who is 44 years old and is expecting a large workman’s comp settlement. He wants to convert the settlement into an income stream. If he puts some of the monies into an annuity with a life insurance company, is there an exception to the 10% IRS penalty for taking money out prior to age 59 1/2 due to his disability?
Permalink Submitted by Al Fry on Thu, 2008-11-20 19:26
Yes. The definition of disability is the same as for IRAs. This can be found in IRC Sec. 72(m)(7). It is similar to, but not the same as the Social Security definition. Most carriers will accept a copy of the Social Security letter of disabilty approval and thus code the 1099-R as a Code 3 exception in Box 7. If not approved for SS, the carrier will need a Doctor’s statement for proof of disabilty, on their forms. Also, if the contract is a new contract immediately annuitized, or an existing contract annuitized for life, the penalty does not apply. Living benifit systematic withdrawals do not meet the annuitization definition.