The Colon Club

I'm planning to start tapping my IRA account this year to make my steadily escalating life insurance premiums. My financial advisor says I have to pay a 10% withdrawal penalty if I'm not on SSDI and not working and younger than 59 1/2. I thought I read here that being Stage 4 CRC is sufficient to avoid the penalty. Maybe I'm remembering incorrectly.

Eric,
Sent you a PM.

Perhaps it'll be helpful to share this information as there might be others with similar questions. In a general sense of course. Thanks.
A

Eric, you should talk with a tax person. I am a banker, but not a tax rule expert, and not an IRA expert. We always advise our customers to talk to their tax person. With that said, there are exceptions to the tax penalty, medical expenses are one reason. Below is an exerpt of some information I have regarding exceptions to the penalty. Take this to your Financial Expert and Tax person and see what they say.

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If younger than age 59½, an IRA owner may qualify for an exception to the 10 percent penalty tax. Here is a list of qualifying reasons for IRA distributions taken before age 59½ to avoid the 10 percent penalty tax:

•Qualified acquisition costs of a first-time homebuyer—IRC Section 72(t)(2)(F)

•Qualified higher education expenses—IRC Section 72(t)(2)(E)

•Certain medical expenses—IRC Section 72(t)(2)(B)

•Health insurance costs for unemployed individuals—IRC Section 72(t)(2)(D)

•Substantially equal periodic payments—IRC Section 72(t)(2)(A)(iv)

•IRS tax levy—IRC Section 72(t)(2)(A)(vii)

•Conversion to a Roth IRA—IRC Section 408A(d)(3)(C)

•Disability—IRC Section 72(t)(2)(A)(iii)

•Death—IRC Section 72(t)(2)(A)(ii)

•Qualified disaster recovery assistance—IRC Section 1400Q

•Qualified reservist distribution—IRC Section 72(t)(2)(G)

•Qualified Health Savings Account (HSA) funding distribution—IRC Section 408(d)(9)

If an IRA owner who is younger than age 59½ determines that his/her IRA distribution is eligible for one of the exceptions to the penalty tax, he/she completes Form 5329 claiming exemption from the penalty tax and showing the reason. However, an IRA custodian/trustee reports a distribution for an IRS levy, any part of a series of substantially equal periodic payments, a conversion by transfer to a Roth IRA, disability, or death as exempt from the penalty tax. In these situations, an IRA owner or beneficiary does not have to file Form 5329 to claim exemption from the penalty tax.

7. Are hardship distributions allowed from an IRA?

Not exactly. There is generally no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as an additional tax on early distributions. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax.
(Code § 72(t)(2)(E),(F))

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions

I would have a conversation with a tax guy, they may know of some special ways to lower tax burden on other things. I know there are deductions that can be taken if you medical costs are a certain percentage of your income.

Did find this: http://money.usnews.com/money/retirement/articles/2013/09/23/11-ways-to-avoid-the-ira-early-withdrawal-penalty

Medical expenses. You can use IRA distributions to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income without incurring the early withdrawal penalty. "The distribution has to be in the same year as the medical expense," says Kathleen Campbell, a certified financial planner for Campbell Financial Partners in Fort Myers, Fla.

Take you out of pocket expenses and divide by you income if it >0.1 you may be able to take advantage of that. Again talk to a CFP or tax person to find out the details.

Eric,

I know that this sounds like a broken record, but a good person is the only one I would trust on this one. We have a great investment guy (we even liked him after 2008) but he would be the first to defer this kind of question to our tax person. If you can take the withdrawal, I assume that it will have to be for specific kinds of expenses, so your recordkeeping will be very important.

For what it is worth, I had this discussion with our tax accountant when I was diagnosed at age 57, and she said at that time we were not eligible, but I was Stage II.

Good luck.

Lois

Social Security has an expedited process for cancer patients who apply for disability. Mine was approved in 2 weeks. Once approved for social security disability you qualify for the exception due to disability.

I think you're getting incomplete answers or mixing issues. One of the exceptions to the 10% penalty is for permanent disability. It's Internal Revenue Code section 72(t)(2)(A).

From IRS Publication 590, p. 57:

"Disabled. If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax.

You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration."

The key is that you have to be permanently or indefinitely disabled (they don't want people drawing from their long-term retirement to cover a "short-term" income gap). You should, of course, check with a tax person, but my understanding is that you don't have to be on social security disability to be considered disabled, but I think it is one way of showing it.

You are correct in that you don't have to be on SSDI to prove disability, however, if one is pulling a salary (as Eric is) and, in his case, also pulling in income from another source (as he indicated), as an accountant (and I say here I am not a tax accountant), I would be very careful about using disability as a reason. One can't say that they are disabled, yet working full time - which would be gainful employment.

http://www.investopedia.com/articles/re ... 111202.asp

Disability
If a physician determines that, because of a mental or physical disability, you are unable to engage in any gainful employment, you are allowed to take penalty-free distributions from your IRA. Also, the disability must be expected to result in your death or determined to last for an indefinite period. These distributions can be taken for any purpose. Check with your IRA custodian/trustee regarding their policy for handling distributions due to disability, as some require proof of disability in the form of a physician's certification.

Years ago for a serious and long term disability (but it did not end up being permanent, thankfully, thank you terrific surgeon!), my husband was able to take an early withdrawal out of a retirement annuity. Since the fund recognized the disability, it checked off the appropriate tax box on the paperwork, and there was not an early withdrawal penalty. Of course, it was still subject to regular income taxes.

I'm thinking that someone employed (ie still on the job collecting a paycheck) would not qualify for a penalty-free-disability-based-withdrawal. Just my thought. Is there still a paycheck you are pulling?

As has been already suggested by many, time to do a quick call to a knowledgeable tax professional.

Eric- if you want to send me a PM with more detail, I can ask my dad. This is not my area but his. This is what he does.

Hi everyone! Long time no "see". I actually saw several of you at Call on Congress this past week and we rocked it!!!!!

Had to chime in as some of you may remember I was an IRS Agent that did audits and addressed these issues! I was an agent up to the point I became disabled and received disability call Medical Disability Retirement. I am Stage III with severe side effects requiring quarterly surgeries.

I did take my TSP equivalent to a 401k and I deemed my 10% penalty can be waived. I determined this because I was determined to be disabled to work full time. I do do a few taxes and that is still ok I can make a little bit of money per my disability retirement. And I want to clarify I do NOT get SSDI.

But being Stage IV does not qualify you unless you are on disability. People who are Stage Four and work full time would not qualify.

If anyone else has tax questions please ask!

Stage IV will get you SSDI quickly (compassionate allowance) but not if you're "engaging in substantial gainful activity" which generally means making more than around $1100 a month.