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

In May of this year, the Internal Revenue Service provided guidance on when a taxpayer may avoid the 10% penalty on IRA distributions before age 59 by claiming to be disabled. In Chief Counsel Advice 200922041, the IRS explained the meaning of “disabled” as it relates to Internal Revenue Code 72(m)(7), the disability exception to the withdrawal rule. Chief Counsel Advice are written advice or instructions prepared by the Office of Chief Counsel and issued to field or service center employees of the IRS or Office of Chief Counsel.

In order to be considered disabled, the individual has to establish that he or she was not able to work in the year of the distribution at an activity comparable to the one in which she would customarily engage. Also, the impairment cannot be diminished, given reasonable effort and safety to the individual, to the extent that it will allow the individual to engage in his customary or any other comparable substantial gainful activity.

Additionally, the disability cannot be a temporary one; it must be one that “can be expected to result in death or to be of long-continued and indefinite duration.”

Source: Academy of Special Needs Planners