Early withdrawal penalty and disability

Submitted by Maggie Benton on Mon, 2015-03-02 23:02

My client is 50 years old and just received a “5 years to live” diagnosis. She wants to be able to use an immediate annuity and avoid the 10% penalty.

The IRS grants exception to 10% penalty if the “condition an be expected to result in death or to be of long, continued and indefinite duration”.

How do we tell the IRS of the disability? Is it just a letter from the physician filed with her tax return each year?



Submitted by Alan - IRA critic on Mon, 2015-03-02 23:51

  • The definition of disability for penalty waiver purposes is stated in Sec 72(m)(7). A physician letter stating the client’s condition falls under that definition should be sent to the IRA custodian with a request to enter disability code 3 on the 1099R. This should not need to be refiled unless the client is no longer eligible. If the custodian will not  issue Code 3, then the client can claim the exception on Form 5329.
  • Not sure why an immediate annuity would be considered for someone with this diagnosis. I think you probably meant the substantially equal payment  (72t)exception, but the disability code is much better since it avoids the inflexibility and risks of a 72t plan.

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