10% Early Withdrawal Penalty Disability Exception

[geekgirldany]

I see what you are saying about taking it out over time through a regular IRA. I ran so many scenarios...she seemed to want to get it all out now. I thought the IRS would be more likely to do a disability exception on a one time withdrawal than withdrawals that were spread out over the years. But of course that may not be true. Well will work with what did happen.

[Burke]

I believe what Burke meant is some 401K plans will not allow a partial distribution and if you want to take any distribution you need to take it all. The entire 170K could have been rolled to a IRA penalty free. Then each year only taking from the IRA what is needed each year. The penalty would only apply to the amount withdrawn each year and most likely would have been at lower marginal rates if spread over a few years.

That is exactly what I meant. You did not give her age, but it might have been that she would have reached age 59 1/2 during that time period automatically avoiding penalty after that date. While funds are in an IRA, they are also protected from creditors but accessible to the client at any time. However, since it is what it is, there is nothing to be done about it now unless she is in the 60-day rollover period. I agree with New York Enrolled Agent as to current treatment on tax return.

[geekgirldany]

Thank you Burke.

I ran that scenario and made the suggestion. I believe she was getting recommendations from everyone that just adds confusion. There probably would have been enough left over to make it to 59 1/2 just barely and avoid the rest of the penalty. Looking back at my worksheets the tax savings of moving to a IRA would have made a big difference.

Anyways, I've been reading through many court cases memo and summary decisions. Many cases that involved depression makes it seem not too hopeful on getting it classified as disability. The one item that came up over and over was:

Mental diseases (e.g., psychosis or severe psychoneurosis) requiring continued institutionalization or constant supervision of the individual.

Many cases were lost because the Tax Court held that the taxpayer did not require constant supervision. Although each cases stated that it was based on the facts and circumstances of the individual. I found one case where the above was never mentioned with depression being the sole reason for disability.

Without SSA Disability I find it hard for her to get the exception as noted. My first choice is NYEA suggestion... doing a extension with her paying in the penalty to see how the SSA hearing turns out. Trying to decide the best way

Thank you all for your time.