Are IRA Distributions Taxable If You Are Disabled?
Distributions made before an IRA beneficiary turns age 59 1/2 are generally subject to an additional 10% penalty tax; however, there may be certain exceptions, including disability.
For a distribution to be eligible under the disability exception, it must be based on a permanent and total disabling condition. Custodians cannot judge whether someone meets this standard; thus a trustee must provide evidence of this condition.
What is a disability?
Disability refers to any impairment that prevents an individual from performing activities normally and within human expectations, or medical condition or disease that limits one or more major life activities such as walking, climbing stairs, seeing, hearing, talking, eating, bathing dressing and self-care.
Under the Tax Code, to qualify as disabled an individual must be unable to work in any substantial gainful activity for an indefinite or extended period. This definition can be difficult to meet even for those receiving Social Security Disability Insurance or Supplemental Security Income and differs significantly from how the ADA defines disability; furthermore, this could conflict with employment discrimination regulations or housing regulations.
How do I know if I’m disabled?
Disability can often be invisible and difficult to identify, impacting individuals of all ages, races, genders and national origins.
Disabilities can be debilitating and affect all areas of life. They also place financial strain on families; many qualifying disabilities qualify for disability benefits through Social Security Administration (SSA).
To qualify, the Social Security Administration has laid out certain medical criteria designed to measure your impairment’s severity.
In general, withdrawing funds from an IRA prior to age 59 1/2 will incur a 10% penalty; however, there may be exceptions if you are disabled, purchasing your first home or incurring high medical costs.
Are IRA distributions taxable if I’m disabled?
Traditional and Roth IRA contributions are usually tax-deductible, while earnings accumulate tax deferred until withdrawal after age 59 1/2. Distributions will then be taxed as ordinary income unless one of several exceptions apply (such as disability or using funds for home purchase).
If you withdraw money from your IRA before reaching RMD age, the IRS may assess a 10% early withdrawal penalty in addition to regular income tax on those funds; however, in cases involving disability this penalty could be waived.
In order to qualify for Social Security disability benefits, your medical condition must prevent you from engaging in substantial gainful activity for at least a year or lead directly to death. That means being unable to perform work that pays wages or salaries regardless of your desire.
How do I claim the disability exception on my tax return?
Social Security disability payments cannot be considered earned income for purposes of contributing to a Roth IRA; other sources, like wages or salary must be available in order to qualify. You can however use part of your disability payments as income to fund traditional IRAs or 401(ks provided that they fall within IRS earnings limits.
Form 1099-R’s instructions provide no other guidance for reporting disability distributions; some financial organizations have adopted this reporting method and require their IRA owners to submit evidence supporting their claim of disability.
An AMBT-SNT provides disabled individuals with the potential for them to convert their IRA and take minimum required distributions over their life expectancy without incurring an early withdrawal penalty of 10%, which could be of great assistance in case they become physically or mentally incapacitated and need access to their retirement savings.
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