In a recent issue of Ed Slott’s newsletter (www.irahelp.com), he talks about penalties-free withdrawals from IRAs, 401(k)s, and other retirement plans for young people under 20. I pointed out that there is a lot of incorrect information above. 59½. As a result, many individuals end up having to pay a 10% penalty for withdrawals that violate the regulations.
If you are under the age of 59 ½ and want to withdraw funds from your retirement account, you should understand the exception to the 10% penalty. Also understand that income tax is required when withdrawing funds from a traditional IRA.
If you make a withdrawal before 59 ½ due to disability, you have a very high burden of proof. Section 72(m)(7) of the Tax Code is very specific. It states that an individual is entitled to an exception to the 10% penalty “for a medical, physical or mental disability that is expected to result in death or that is expected to last for an extended period of time for substantial benefit.” only if you are unable to engage in activities that result in Indefinite period. An individual shall not be considered disabled unless he/she presents proof of his/her existence in such form and manner as may be required by the Secretary. “
People are also reading…
Retirement from work because of a disability does not necessarily mean that you are eligible under Section 72(m)(7). You will need to provide a report from your doctor, but that may not be enough. Submitting reports from multiple doctors can help your case.
Some exceptions also apply to account holders. For example, Slott points to a case in his newsletter where the owner’s spouse, not the IRA owner, became disabled. The couple jointly filed a tax return, but the application was denied. A 10% exemption to disability that applies only to IRA holders.
In the newsletter, Slott gives some examples where the 10% exception is not met due to the following circumstances:
- A family member is now disabled, not the IRA owner.
- No letter from the doctor was submitted.
- The court ruled that the impairment was correctable and not “indefinite.”
- The owner had a diagnosis of diabetes that the court believed had not reached a sufficient level of disability.
Employer Retirement Plans and IRAs
There are exceptions that do not apply to IRA holders if their employer has a retirement plan. If you reach the age of 55 and leave the Service, even if you are under the age of 59 ½, you can still make withdrawals without penalty.
There are higher education exemptions for eligible education expenses that are allowed under traditional IRAs and Roth IRAs but not under 401(k)s. These costs may be borne by the IRA owner, his/her spouse, or the IRA owner’s children or grandchildren. You must submit Form 5329. This exception is not allowed for the owner of her 401(k), but she can roll over the 401(k) to her IRA and then use this waiver.
The medical disability exception applies to IRAs and employer retirement plans. Medical expenses in excess of 10% of your adjusted gross income can be withdrawn from your IRA or Roth IRA without the 10% penalty, even if you are under 59 ½ years of age. These costs can be associated with your spouse and dependents.
First-time homebuyers under the age of 59 ½ can withdraw up to $10,000 lifetime limits from their IRA or 401(k) without incurring a 10% penalty. However, it is not limited to purchases for you and your spouse. Suitable for parents, children and grandchildren.
The bottom line: Of course, investing your retirement money for as long as possible pays off in the long run. However, if you must withdraw before 59 ½, do your homework to avoid the 10% penalty.
Elliot Raphaelson welcomes questions and comments at email@example.com.