Disability waiver for IRA early withdrawal penalty

Submitted by Tim Seiders on Thu, 2022-08-11 14:52

I have a client in her 40s who recently went through extensive chemotherapy to treat a rare cancer.
She did not work during the time of the treatment. Even though she received short-term disability benefits she suffered a loss of income and incurred additional expenses.
During the time of the treatment she was “completely disabled”, it was uncertain whether or not the treatment would work, Her prognosis is good although not certain. She will be able to return to work.
She may have no other choice but to access her IRA. The 10% penalty in addition to the tax seems cruel. In addition due to her age she may have to pay income tax to her state of residence, PA.
Are there any remedies?



Submitted by Alan - IRA critic on Thu, 2022-08-11 16:11

  • Below is the definition of disability for purposes of the penalty waiver. If she can get a note from her MD that she meets these requirements and provides a copy to her IRA custodian, the 1099R should be coded 3 for disability and the penalty will not apply.
  • Without the letter, the custodian will code the 1099R with early distribution Code 1. If she still feels that she meets the definition, she can file  Form 5329 with her return and enter exception code 03 on line 2. While the IRS will probably not question it, having the custodian issue Code 3 provides less uncertainty.
  • “(7)Meaning of disabledFor purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.”

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