57 year old suffered stroke, needs to take money from Simple IRA. What are penalties, or does he have exception?

Submitted by Jon Steffen on Mon, 2024-09-16 11:43

I have a 57 year old client that suffered a stroke.  He worked in IT, but can no longer type or use a mouse.

In 2018 he started a Simple IRA at American Funds with ABC, LLC.

In 2023 we opened a Simple IRA at Schwab for him with ABC, LLC.  There is $20,000 in his Simple IRA at Schwab.

He has a $25,000 medical bill and other monthly bills to live.

If he takes a distribution at age 57, didn’t have his new Simple open for 2 years, but still has his other Simple from the same employer for more than 2 years, what will his likely penalty be?

Does he have to use the distribution to pay for the >+7.5% of AGI unreimbursable medical expense, or does he qualify for the exception just by having the $25k bill, but his distributions can be used for daily living without penalty?

 



Submitted by Alan - IRA critic on Mon, 2024-09-16 12:03

Was the balance in the first SIMPLE IRA transferred to the Schwab SIMPLE?  Schwab may, but is not required to recognize the holding period from the first SIMPLE of the same employer, and any distribution could be coded S due to new meeting the 2 year holding requirement at Schwab. Code S includes a 25% penalty.

Has client filed for SSD or can client get a statement from his MD that he meets the disability requirements?  The disability exception would waive the penalty, but the distribution would be included in ordinary income, although if he can itemize deductions including medical, that would reduce his taxable income.

 

Submitted by Jon Steffen on Mon, 2024-09-16 13:01

His first SIMPLE is still in tact and payroll deposits funds to there.  Then every 6 months or so we do a transfer to his Schwab SIMPLE.  We did this because his Payroll provider couldn’t figure out how to send the funds to another financial institution.  (Long story)

He has filed for SSD and his MD will attest that he is disabled.  Does Schwab just code it as premature and then the client and CPA need to explain on his tax return?

Submitted by Alan - IRA critic on Mon, 2024-09-16 13:21

If an MD statement that he meets the disability requirements of Sec 72(m)(7) is provided to Schwab by the time he takes the distribution, they should code the 1099R with code 3 (disability) instead of Code S. That would eliminate the need to file a 5329.

The other option is to just let Schwab code it with S (or 1), and file Form 5329 with exception code 03 to override the penalty. The IRS is unlikely to question the 5329 for a distribution of this size.

Note that in some cases sufficient recovery from a stroke would be enough for him to return to work but with limited earnings to allow any SSD award to continue. Therefore, for a time the SIMPLE IRAs should probably be left open. If there was major recovery, he could eventually lose the SSD award or no longer qualify for the exception.

Submitted by Jon Steffen on Mon, 2024-09-16 16:48

Much appreciated Alan!  This was way better info than Schwab gave me.

I’ll tell the client to get an MD statement so we can try to get Schwab to code it “3” so we can avoid the 5329 form.

 

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