IRA withdrawals for terminally ill disabled spouse + inheritance questions

[Snidely Whiplash]

Spoke with my CPA earlier today, but as my thinking isn't as straight as it should be at times, I was hoping someone here might have some insight. I have full faith in my CPA but this isn't something anyone deals with on a regular basis. And I want to make sure I'm not misunderstanding anything.

Situation: i am 48, wife is 54 and has been diagnosed with incurable and inoperable pancreatic cancer w/ metasticis to her liver. It's a rare form of pancreatic cancer (the Steve Jobs type, not the Patrick Swayze type) but the outlook is still not good. Social Security approved her disability within two weeks of her applying with a backdated date of disability by 6+ months. We are both each other's sole beneficiary for all matters and accounts financial.

Question #1 - Wife has a regular IRA at Vanguard and it probably makes sense for her to withdraw a minimal amount as "fun" money now if we are not subject to the 10% penalty tax. Our CPA indicated that she would be able to begin withdrawals now but that the amount would be set based upon her actuarial life expectancy of 30.5 years. So her withdrawal amount for the next 5 years (until she is 59.5 years old, God willing) would be the current balance of her IRA divided by 30.5. At 59.5 years old she could change the withdrawal amount to whatever she wishes. Does this sound correct?

Question #2 - When my wife dies, I have the option of (1) maintaining the IRA in her name with me as a widower beneficiary and continuing her payouts as described above regardless of my age or stopping the payout completely, or (2) transferring the IRA to my name and it functions as if it were mine in all regards including the withdrawals without penalty starting at age 59.5 for myself. Does this sound correct?

I'm a bit of an OCD type personality so knowing my options ahead of time gives me some peace of mind. I'm grateful for any advice provided.
.

[meierlde]

From IRS Pub 554 part on exceptions to 10% penalty "General exceptions to tax. The early distribution tax doesn't apply to any distributions that are:

• Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service),
• Made because you are totally and permanently disabled, or
• Made on or after the death of the plan participant or contract holder."
• "

So since your wife is totally and permanently disabled she should fall under the totally and permanently disabled exception.

[Snidely Whiplash]

You are correct, the disability aspect clearly qualifies her for the early withdrawal without penalty. But I wasn't expecting the specific withdrawal amount.
.

[Souschef]

First,
I am so sorry about your wife' diagnosis. I lost my wife to cancer.
In reply to question 2, When my wife died, I transferred her IRA into my name. The difference was we were both 60+. so there was no penalty. I did not touch it until age 70, when I had to take the RMD.

[zinger1457]

Quote:

Originally Posted by Snidely Whiplash Question #1 - Wife has a regular IRA at Vanguard and it probably makes sense for her to withdraw a minimal amount as "fun" money now if we are not subject to the 10% penalty tax. Our CPA indicated that she would be able to begin withdrawals now but that the amount would be set based upon her actuarial life expectancy of 30.5 years. So her withdrawal amount for the next 5 years (until she is 59.5 years old, God willing) would be the current balance of her IRA divided by 30.5. At 59.5 years old she could change the withdrawal amount to whatever she wishes. Does this sound correct?

It sounds like your CPA is using the life expectancy withdrawal (72t) method which would work but not really needed for your wife. Since your wife is disabled she could use the disability exemption and just withdraw money as needed. Just don't forget that you'll still have to pay taxes on any withdrawals.

[GrayHare]

Quote:

Originally Posted by Snidely Whiplash You are correct, the disability aspect clearly qualifies her for the early withdrawal without penalty. But I wasn't expecting the specific withdrawal amount. .

Sorry to hear about your wife's situation. Note that qualifying for SSA disability does not necessarily mean "totally and permanently disabled". The latter is a separate designation by a doctor. There may be an IRS form for this purpose but I cannot recall its name.

[NW-Bound]

I am sorry about your wife. I saw your earlier thread. I did not know you are both so young.

About the IRA withdrawal, it looks like you should be able to withdraw as much as you want, and only have to pay the income tax. There's no limit other than your ability to bear the higher tax rate. And yes, as an earlier poster stated, you will need a formal medical opinion.

From a Web site:

IRA Disability Distribution

You must be permanently and completely disabled, according to the IRS definition, to take advantage of IRA disability rules. You must be unable to perform significant gainful activity, meaning you can no longer work enough to earn a living. A physician must certify that the physical or mental impairment is continuous and of long and indefinite duration, or is expected to lead to death.

Traditional IRAs

When you withdraw funds early from a traditional IRA due to a disability, the IRS waives the 10 percent penalty. However, money taken out of a traditional IRA is still subject to ordinary income taxes. You must report the withdrawal on your tax return and pay taxes due for the year the withdrawal is made. Simplified Employee Pension IRAs and Savings Incentive Match Plans for Employees are governed by traditional IRA distribution rules. Consequently, a disability withdrawal from a SEP IRA or SIMPLE IRA does not incur the 10 percent penalty, but you still have to pay income taxes on the money withdrawn.

And what you will need is IRS Form 5329.

And how do you tell IRS the 10% penalty doesn’t apply to you because you are disabled? Simple, you file IRS Form 5329 with your tax return. Along with properly completing the form, you should submit at least one signed letter from a licensed physician attesting to the severity of your disability. That will generally satisfy any questions IRS might otherwise have. Remember, just as your custodian is not really equipped to say how disabled you are, neither is IRS. So if you can proactively provide appropriate evidence from a doctor, it’s usually enough to satisfy IRS that you are, in fact, disabled enough to claim the exception.

[Snidely Whiplash]

Quote:

Originally Posted by Souschef First, I am so sorry about your wife' diagnosis. I lost my wife to cancer.

And I am sorry for your loss. It's crummy.

Was putting her IRA in your name the only option you had?

Quote:

Originally Posted by zinger1457 It sounds like your CPA is using the life expectancy withdrawal (72t) method which would work but not really needed for your wife. Since your wife is disabled she could use the disability exemption and just withdraw money as needed. Just don't forget that you'll still have to pay taxes on any withdrawals.

Yes, we understand withdrawals will be taxed as ordinary income. I just don't want to subject us to additional penalties (10% early withdrawal, etc). Ideally we would like to withdraw less than "total balance divided by 30.5" and I'm not seeing that formula listed as a requirement for an under 59 1/2 year old disabled person. Are you saying our CPA is in error about that? I don't mean that as a slight against our CPA. I'm not sure many are in our situation. It's probably an issue most will never have to deal with.

Quote:

Originally Posted by GrayHare Sorry to hear about your wife's situation. Note that qualifying for SSA disability does not necessarily mean "totally and permanently disabled". The latter is a separate designation by a doctor. There may be an IRS form for this purpose but I cannot recall its name.

There is no doubt we can get what we need from my wife's Doctor. With the amount of disease my wife has and the taxing nature of her treatment she is, by anyone's definition, totally and permanently disabled. Thank you for your input. I'm grateful you would take the time to respond.

[Snidely Whiplash]

Quote:

Originally Posted by NW-Bound I am sorry about your wife. I saw your earlier thread. I did not know you are both so young.

Things haven't gotten any easier since that post. I do feel like we are young to have to be dealing with the this.

My apologies for the vulgarity : When I was a little boy I had an uncle who was very much rough around the edges. I can remember him telling me "Life ain't for no candy-@$$&$". Boy, was he ever right.

Quote:

Originally Posted by NW-Bound About the IRA withdrawal, it looks like you should be able to withdraw as much as you want, and only have to pay the income tax. There's no limit other than your ability to bear the higher tax rate. And yes, as an earlier poster stated, you will need a formal medical opinion.

Her IRA is mostly invested in bluest of blue-chip stocks. JNJ, KO, PM, XOM, GE, etc. The amount the CPA is telling us we would have to withdraw for 5 years is more than we would like to. We would really prefer just to withdraw the dividends from the account. Just a little bit of "extra" money for my wife to use for niceties that she otherwise would not buy for herself.

Quote:

Originally Posted by NW-Bound From a Web site: IRA Disability Distribution You must be permanently and completely disabled, according to the IRS definition, to take advantage of IRA disability rules. You must be unable to perform significant gainful activity, meaning you can no longer work enough to earn a living. A physician must certify that the physical or mental impairment is continuous and of long and indefinite duration, or is expected to lead to death.

Although I wish not, She would clearly meet all of those conditions.

Quote:

Originally Posted by NW-Bound Traditional IRAs When you withdraw funds early from a traditional IRA due to a disability, the IRS waives the 10 percent penalty. However, money taken out of a traditional IRA is still subject to ordinary income taxes. You must report the withdrawal on your tax return and pay taxes due for the year the withdrawal is made. Simplified Employee Pension IRAs and Savings Incentive Match Plans for Employees are governed by traditional IRA distribution rules. Consequently, a disability withdrawal from a SEP IRA or SIMPLE IRA does not incur the 10 percent penalty, but you still have to pay income taxes on the money withdrawn.

I've looked several places myself and don't see anything about the "total balance divided by life expectancy" requirement for disability related withdrawals. But I don't want to withdraw a lesser amount and find out at tax time I'm wrong and be in a jam and subject us to additional penalties.

Quote:

Originally Posted by NW-Bound And what you will need is IRS Form 5329. And how do you tell IRS the 10% penalty doesn’t apply to you because you are disabled? Simple, you file IRS Form 5329 with your tax return. Along with properly completing the form, you should submit at least one signed letter from a licensed physician attesting to the severity of your disability. That will generally satisfy any questions IRS might otherwise have. Remember, just as your custodian is not really equipped to say how disabled you are, neither is IRS. So if you can proactively provide appropriate evidence from a doctor, it’s usually enough to satisfy IRS that you are, in fact, disabled enough to claim the exception.

That's good information. Thank you for taking the time to post it

[zinger1457]

Quote:

Originally Posted by Snidely Whiplash Yes, we understand withdrawals will be taxed as ordinary income. I just don't want to subject us to additional penalties (10% early withdrawal, etc). Ideally we would like to withdraw less than "total balance divided by 30.5" and I'm not seeing that formula listed as a requirement for an under 59 1/2 year old disabled person. Are you saying our CPA is in error about that? I don't mean that as a slight against our CPA. I'm not sure many are in our situation. It's probably an issue most will never have to deal with.

There are several situations that exempt you from the 10% penalty for early withdrawals, your CPA gave you one of the ways but it's probably not the best for your situation and needs. If use use the disability exemption your wife should be able to take withdrawals for any amount and only when needed. Suggest you look at IRA Pub 590-B for more details.

[gauss]

The method described by your CPA of a specific amount based on life expectancy is known as a 72(t) withdrawal. It is available to everyone.

Since you qualify under the total and permanent disabled exception, you would have no need to setup a 72(t) withdrawal. They are two separate things.

As mentioned above, on form 5329 you can have the penalty zeroed out with the exception code listed for total and permanent disability. It is near the top of the form. I believe that you will only need to fill out the first 4 lines.

The 72(t) plan (ie specific withdrawal amount) is only of interest to those who cannot qualify for one of the other exemptions such as disability.

Very sorry to hear about your situation.

-gauss

[Ed_The_Gypsy]

Quote:

Originally Posted by meierlde Made because you are totally and permanently disabled...." "

Unbelievable! Congress made a sensible rule!

I am terribly sad for anyone in this situation. It is a small ray of light that an exception was created for people in extreme distress. If possible, please take some comfort in this.



Sent from my SM-G900V using Early Retirement Forum mobile app

[Snidely Whiplash]

Quote:

Originally Posted by gauss Since you qualify under the total and permanent disabled exception, you would have no need to setup a 72(t) withdrawal. They are two separate things.

Thank you so much for verifying what I thought was the case. With all that's going on my thinking isn't always straight and before I made moves in her account (turning off dividend reinvestment, setting up the monthly withdrawal, etc) I was hoping for some confirmation that my understanding was correct.

Quote:

Originally Posted by Ed_The_Gypsy I am terribly sad for anyone in this situation. It is a small ray of light that an exception was created for people in extreme distress. If possible, please take some comfort in this.

At this point we are not in dire need of the money, so we are very blessed in that regard. The withdrawals will allow my wife to enjoy a few "luxuries" that she otherwise would be too frugal to pay for out of our joint account. Regular pedicures, new pajamas (several pair were radiated by her treatments), a coffee-treat when out, etc. She has never in her life indulged herself in, what I would consider, minimal extravagances that she should now be treating herself to instead of denying herself with an eye to the future. If she feels like it's "her money" and only dividends, not principle, she won't deny herself some small items that will help keep her spirits up.

[Snidely Whiplash]

Quote:

Originally Posted by zinger1457 There are several situations that exempt you from the 10% penalty for early withdrawals, your CPA gave you one of the ways but it's probably not the best for your situation and needs. If use use the disability exemption your wife should be able to take withdrawals for any amount and only when needed. Suggest you look at IRA Pub 590-B for more details.

I looked at 590-b and I don't see a rule requiring the calculation I described earlier be applied for disability withdrawals. It also looks like I would qualify for the "medical costs above 10% of gross income" rule.

Looking at the publication you suggested makes me think maybe I should rethink my strategy and pull out as much as possible while we have these big medical bills and are in a substantially -0- tax bracket. Essentially transfer those assets to a taxable account now while it would be tax free.

Ive got some more thinking to do.

[Chris7]

Others have already posted great answers on the question. I just wanted to say I am so sorry the two of you are having to face this, but glad there will be some rays of sunshine to help.

cd :O)

[akck]

Quote:

Originally Posted by Snidely Whiplash And I am sorry for your loss. It's crummy. Was putting her IRA in your name the only option you had?

Here are your options:

https://www.thebalance.com/what-happ...r-dies-3505228

[Snidely Whiplash]

Quote:

Originally Posted by Chris7 Others have already posted great answers on the question. I just wanted to say I am so sorry the two of you are having to face this, but glad there will be some rays of sunshine to help. cd :O)

Thank you for your kind words.

Quote:

Originally Posted by akck Here are your options: https://www.thebalance.com/what-happ...r-dies-3505228

That information is a big help. I'm grateful to you for posting it.