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Am I exempt from 10% early withdrawal penalty??
Old 02-15-2012, 06:51 AM   #1
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Am I exempt from 10% early withdrawal penalty??

I'm 55 and have been with the same company for 31 years. Supposedly I qualify for full company retirement benefits under the 85 rule (55 years of age, plus 31 years of service = 86). I'm also rated as 100% disabled by the VA (permanent and total). Will I be exempt from the 10% penalty on IRA early withdrawals because of my disability rating?
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Old 02-15-2012, 07:09 AM   #2
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Interesting topic...for a nutshell description of the IRS stance:

IRS Issues Guidance on Disability Exception to Early Distribution From IRA Penalty

In there it references the full general guidance that you can find here:

http://www.irs.gov/pub/irs-wd/0922041.pdf

In a nutshell:
"[He/she] 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."

"Generally it is intended that the proof [of disability] be the same as where the individual applies for disability payments under social security."

My GUESS is that you could try to use the VA disability, but you have obviously "engaged in substantial gainful activity." and would be denied.

The right route would be to see if you qualify for disability under SS. If you get that, then you've apparently met the burden of proof for the IRS.

YMMV and I am NOT a lawyer, don't take my advice!
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Old 02-15-2012, 07:15 AM   #3
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I think you may be able to do so using SEPPs, see-
Understanding Substantially Equal Periodic Payments
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Old 02-15-2012, 07:36 AM   #4
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Look at #3 on this link:

9 Penalty-Free IRA Withdrawals

Note that it refers to the company holding your IRA(s) use the correct code on distribution.

However through actual experience, I've found that this is the theory but not necessarily fact.

My son was found totally disabled and his SS credits over the years ensured that he would be getting income via SSD (Social Security Disability, not to be confused with SSI).

In 2005, when he was moving from a group home to a shared apartment, he needed money to set up housekeeping. The majority of the funds were from his Roth IRA's, held with Vanguard.

I spoke/documented with Vanguard that upon liquidation of his IRA, the distribution code should reflect his disability status (confirmed by the government - SS). However, when he received his 1099-R at year end, it reflected Code 1 (early distribution - no known exception) rather than Code 3 (Disability).

I contacted Vanguard to get a corrected 1099-R, but they informed me that the government was requiring them to issue all 1099-R's without the disability code. Apparently there were folks contacting the IRA administrator (not only Vanguard, but all other companies) without proper proof/documentation of the disability, and it was now up to the IRS to document/approve the code rather than leave it up to the 1099-R issuer.

When I completed my son's taxes, he had nothing due on the distribution (including the fact that he had held the account over five years, per the rules). I again sent a supplemental letter to the IRS to document this fact, along with all communications from SS (approving his disability) and Vanguard correspondence.

Of course, no documentation was ever reviewed (or it was ignored) and his return was spit out with normal taxes and 10% levy due. This notice was received in 2007, two years after the fact.

Upon receiving the notice from the IRS, I again (twice) documented the facts. Again (twice), my son received dunning notices from the IRS, now with additional fines/interest due.

I took the matter up with my local representative and through back and forth actions, took 2.5 years to settle. Even though my congressman's office was working with the IRS, my son continued to receive dunning notices, up to the point of threat of execution of seizure of assets to satisfy the debt. The taxpayer's advocate's office was useless in this exercise, BTW.

In the end, the matter was resolved with no amount due. In fact, he received a small refund.

Hopefully, your experience will be better but I thought I'd just pass on our experience.
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Old 02-15-2012, 11:39 AM   #5
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Interesting narrative, rescueme. The IRS always seems to take the worst case situation when sending out their dunning letters.

Did you by chance file Form 5329 with his tax return? The IRS likes to see these things on their forms and their format. I've had problems in past with "just including a note"
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Old 02-15-2012, 02:17 PM   #6
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Quote:
Originally Posted by RE2Boys View Post
Did you by chance file Form 5329 with his tax return? The IRS likes to see these things on their forms and their format. I've had problems in past with "just including a note"
The form was not included with the original filing, but was done so as part of the "early intervention" of the Advocates’ office and then again when my congressman's office got involved.

In both cases, the form did not "reset" the initial submission, as expected by both offices and had no immediate effect on the situation.
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Old 02-15-2012, 02:23 PM   #7
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Quote:
Originally Posted by RE2Boys View Post
Interesting narrative, rescueme. The IRS always seems to take the worst case situation when sending out their dunning letters.

Did you by chance file Form 5329 with his tax return? The IRS likes to see these things on their forms and their format. I've had problems in past with "just including a note"
Back when my BIL had problems with the IRS, it seemed that the computer was 'in charge' and nothing much could be done about it. He got letters all the time, but since he was in BK he was not supposed to get them... calling did nothing, sending letters did nothing, even the BK judge's letter did nothing... you would get a person who said they would take care of it, but then later you would get another letter with a different office to call etc... and it started all over again...
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Old 02-16-2012, 04:07 AM   #8
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Does your company offer a 401K plan that you can invest in and transfer IRA funds to? You can start taking penalty free withdrawals from a 401K if you retired during or after the year you turn 55.
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Old 02-16-2012, 08:17 AM   #9
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Quote:
Originally Posted by zinger1457 View Post
Does your company offer a 401K plan that you can invest in and transfer IRA funds to? You can start taking penalty free withdrawals from a 401K if you retired during or after the year you turn 55.
+1

Great thought.
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