Early IRA Withdrawal and the Definition of Permanent & Total Disability
The Internal Revenue Service may require a 10 percent early withdrawal penalty if you take a distribution from your individual retirement account before age 59 1/2. You might also have to pay taxes on the distribution at your regular income tax rate. However, if you become disabled, the IRS may waive the early withdrawal penalty, as long as you meet certain guidelines.
Proof of Disability
If you are claiming an exception to the early withdrawal penalty because of a disability, you must file IRS Form 5329 to claim the exception and attach supporting evidence. A mental or physical disability must prevent you from doing "substantial gainful activity." In addition, you must provide a doctor's statement supporting your claim. Although the IRS may waive the 10 percent penalty, income taxes are still due on distributions from a traditional IRA. For a Roth IRA, income taxes will be due on any account earnings unless the account is more than five years old.
The IRS definition of "substantial gainful activity" generally means work that is meaningful and productive and pays a regular wage or salary. If you have physical limits but earn money on a regular basis as a security guard or baby sitter, for example, you are doing substantial gainful activity. If a hospital or school takes you on from time to time as a volunteer, providing simple "make work" activities, the IRS would not consider the work substantial or gainful.
Your doctor must expect your disability to be "of long-continued and indefinite duration," according to the Internal Revenue Code. This is the same general guideline that applies to the tax credit for the disabled that is available on IRS Form 1040.
A finding of disability by the Social Security Administration will usually be enough to prove your condition to the IRS. Social Security applies specific income guidelines to "substantial gainful activity," and these change regularly to account for inflation. As of 2013, Social Security considered anyone earning more than $1,040 a month, before withholding, to be engaged in substantial gainful activity. Social Security also requires a disability to have lasted, or to be expected to last, at least 12 months.
- IRS: Publication 590: Traditional IRAs
- IRS: Instructions for Schedule R: Credit for the Elderly or Disabled
- Legal Information Institute: Annuities: Certain Proceeds of Endowment and Life Insurance Contracts
- Social Security Administration: How Do We Define Disability?
- IRS: Form 5329: Additional Tax on Qualified Plans ...
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.