As discussed elsewhere in this blog, one of the 72(t) exceptions for IRA early withdrawal is due to disability. However, a recent tax court decision cemented the fact that the disability in question only applies if the owner of the IRA is disabled. It is not enough that the spouse of the IRA owner is disabled.
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In a recently-issued TC Summary Opinion 2020-5, the case at hand was argued that the taxpayer had taken a qualified IRA early withdrawal of funds prior to his age 59½ due to his spouse’s disability (there were other issues with the tax return, this factor is explained last on the Opinion).
The Tax Court acknowledges that Section 72(t)(2)(A)(iii) allows for an exception to the 10% penalty if the employee is disabled within the meaning of Section 72(m)(7). As defined in Section 72(t)(5), the term “employee” means “the individual for whose benefit such plan was established”.
Since the plan was established in the name of the husband, he is considered the “employee”. The husband was not disabled at the time of the early withdrawal. The wife was disabled, but no IRA early withdrawal was made from an IRA established for her benefit. Therefore, the 10% penalty for early withdrawal of IRA funds applies in this case.
If a withdrawal had been made from an IRA in the wife’s name, or if the husband had been the one disabled, either circumstance would have allowed for the exception to the early withdrawal penalty.
There are many other exceptions to the IRA early withdrawal penalty, and you can find out more about those in the article 19 Ways to Withdraw IRA Funds Without Penalty. For an employer plan, such as a 401(k), you might read 16 Ways to Withdraw Money From Your 401k Without Penalty.
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