Disability Distribution Code on 1099
I had a client that made two separate IRA distributions in 2009. She is 54 but disabled. In completing the distribution paperwork we had correctly checked off the box indicating “Certification of Disability” on one form, but not the other. Subsequently, she received two 1099s, one showing distribution code of 3 (correct) the other of 1(incorrect). The custodian told me that since the form came in without the “Certification of Disability” box checked that they cannot change the distribution code nor can they re-issue the 1099 with “3”. Any ideas for handling this issue in regards to my client filing her taxes and avoiding the 10% surtax?
Thanks,
larry moran, mba, clu.
Permalink Submitted by Alan Spross on Fri, 2010-02-26 00:17
Larry,
Yes. Just file a 5329 changing the “1” to exception code “03” on line 2. This is alot easier than convincing an IRA custodian to amend their 1099R.
But in this situation, the client should always retain some form of medical evidence that they meet the definition of not being able to do “any substantial gainful activity et al” per Sec 72(m)7, just in case the IRS inquires. Qualification for SSD is rarely questioned as a deciding factor, but the fact remains that the penalty exception is actually tougher than the criteria SSA uses in awarding disability benefits.