Annuities and Premature Distribution Penalty (IRC CODE SEC. 72(t)(2)) Exceptions

Written by Hersh Stern Updated Tuesday, March 26, 2024

Following is an example of a taxpayer under age 59½ who wanted to take distributions early from a qualified plan. The man in question was a dentist but was unable to practice his profession because of an injury to his right thumb. This injury resulted in significant and irreversible nerve damage. Four insurance companies found he was unable to engage in his regular profession, and that the disability was permanent.

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The taxpayer requested a ruling that he was disabled within the meaning of Code Sec. 72(m)(7) and thus exempt from the 10% penalty on premature distributions under Code Sec. 72(t)(2)(A)(iii). The IRS noted that an individual will be considered disabled under Code 72(m)(7) 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.

Since the question of whether an individual is disabled involves a factual determination, IRS concluded that it would not issue a ruling as to whether the taxpayer was disabled within the meaning of Code Sec. 72 (m)(7). IRS Letter Ruling 9621043.Observation: Code Sec.72(m)(7) provides that an individual will not be considered disabled unless he furnished proof of the disability in the form or manner required by the IRS. There is no specific guidance as to what form or in what manner proof must be furnished. Furthermore, IRS has now taken the position that it will not issue a ruling as to whether a taxpayer will be considered disabled. A taxpayer who is claiming to be disabled should thus be prepared to support his claim by medical testimony or other appropriate documentation which can be presented if his claim is challenged.

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