Disability “Type 3” IRA Withdrawals
Hi: Is it true for individuals who are on disability and take a distribution from a IRA that if the distribution is coded as IRS Type 3 the federal taxes owed can be a lesser amount? Thanks in advance!
Hi: Is it true for individuals who are on disability and take a distribution from a IRA that if the distribution is coded as IRS Type 3 the federal taxes owed can be a lesser amount? Thanks in advance!
Permalink Submitted by Alan - IRA critic on Thu, 2014-11-13 23:41
Disability reflected by Distribution Code 3 allows the distributions to avoid the early withdrawal penalty of 10%. It does not change the ordinary income tax due as calculated when filing the tax return.
Permalink Submitted by tomd37 on Fri, 2014-11-14 00:08
Alan – Might also the distribution code 3 on the 1099-R allow the taxpayer to have the disability income reported as wages on the 1040 and possibly have that income qualify as earned income for the earned income tax credit if the taxpayer otherwise qualifies? Tom D.
Permalink Submitted by Alan - IRA critic on Fri, 2014-11-14 01:06
Tom, possibly on a 1099R issued by an employer plan or employer purchased disability policy before reaching retirement age and reported on line 7 as wages, but if the IRA box is checked reflecting an IRA distribution, the distribution would not be disability income itself. It would be retirement income being tapped due to IRA owner needing the income. I am not aware of any circumstances under which an IRA distribution would be reported on other than line 15, but I think if the 1099R was from an employer plan and reportable on line 7 prior to retirement age for the employer, it would be earned income for the EITC.