72t and Early Withdrawal

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L1: 72t and Early WithdrawalI have a client who has been unemployed for the last two months and started taking 72t distributions to make ends meet. He has had some medical problems in the past and was recently awarded disability from Social Security. He wants to take and additional distribution from the IRA, however, I am concerned that it will disrupt the 72t payment schedule (in the eyes of the IRS). Publication 590 clearly states that a disabled person, with proof, can take a payment without having the 10% early withdrawal penalty.
In this situation, is an extra distribution allowed and continue to keep the payment schedule in tact or will the 72t payment schedule be nullified?
Douglas2005-08-30 14:16, By: Douglas, IP: [134.215.201.73]

L2: 72t and Early WithdrawalYou might want to bust the SEPP 72-T now. The distributions are taxed anyway, but may be offset by the medical expenses (except for the 7.5% of AGI threshold).He would have a 10% penalty on onlythe 2 payments.
Then put the funds back into a regular IRA. There is no 10% penalty if the taxpayer satisfies all of the “TOTAL disability” exception requirements.2005-08-30 14:36, By: dlztaxes, IP: [4.175.9.127]

L2: 72t and Early WithdrawalDouglas:
I’m not completely sure of the timing, but it sounds like the 72(t) distributions have occurred very recently. Anyfunds you can get back into the IRA within 60-days of their distributions will come under the 60-day rollover rules, unless the IRA was established by 60-day rollover within the last 12 months. If you can get it back into the IRA and cancel the 72(t), then you are clear to run with dlz’s idea. Check with you client’s CPA resources to determine how dlz’s ideas about the health or disability distributions will work.
Jim2005-08-30 15:44, By: Jim, IP: [70.184.1.35]

L2: 72t and Early WithdrawalIf the client is disabled, then he/she can discontinue the 72(t) payments and take subsequent distributions as disability distributions. There will not be any penalties on the payments already taken under the 72(t). These -72(t) amountsdo not need to be rolled over either.The client should ask the custodian-in writing- to process future distributions as disability’ distributions, instead of 72(t). Since the client will likely receive 2 1099-Rs for the same account for the year (one showing Code 2 for the SEPP and the other showing code 3 for the disability), it may make sense to attach a letter of explanation to his tax returnSee the instructions for Schedule R-Form 1040 at http://www.irs.gov/pub/irs-pdf/i1040sr.pdf. This may be helpful. The custodian may require a copy of Schedule R-Form 1040 or a note from your physician, confirming your disability. Important there may be a question of whether the social security definition of disability applies, as it appears that the two definitions could be different, since the social security definition says that the disability must last or be expected to last for at least one year_whereas the definition for IRA purposes does not mention this one year period. Instead, it defines disability within the meaning of Section 72(m)(7), which is as follows _۝ For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.۝ _also as defined in Treasury Regulations Section 1.72-17A(f), which adds that _۝ In determining whether an individual’s impairment makes him unable to engage in any substantial gainful activity, primary consideration shall be given to the nature and severity of his impairment. Consideration shall also be given to other factors such as the individual’s education, training, and work experience_.۝
2005-09-09 04:06, By: Denise Appleby, IP: [68.38.254.240]

L2: 72t and Early WithdrawalThat makes sense that if you die or become disabled it is not a ”bust” of a 72(t). If you die the beneficiary takes over, and if you become disabled the IRA owner has the same rights as the beneficiary of the decedant”s IRA. Thanks Denise.
I can”t imagine your client having any problems complying with the ”disability” requirements for the IRS since he / she has already qualified for disability with the Social Security Administration. SSA Disability is extremely hard to qualify for and I think the IRS would be hard pressed to turn this down.
Jim2005-09-09 09:14, By: Jim, IP: [70.184.1.35]