Five Ways to Withdraw Your Retirement Savings Early – Part 1

Use disability-based exemptions to withdraw from your retirement savings before age 59 1/2 without a 10% penalty.

There are numerous exceptions to the 10% penalty on early distributions from retirement accounts. In this series, we will help educate consumers on many of the lesser known exceptions.

The first exception in the series focuses on total disability. Here are some important facts to know about claiming the disability exception.

1. Exception Applies to Employer Sponsored Retirement Plans and IRAs

The disability exception is one that can be used to avoid the 10% penalty, regardless of the type of retirement account from which the distribution is generated.

2. Total Disability Is Required

In order to qualify, the IRS requires a total disability which prevents work of any kind and is expected to continue indefinitely, possibly resulting in death.  Changing jobs because of injury or “retiring on disability” while still able to work will not be considered totally disabled for purposes of this exception.

3. 1099-R Reporting

Anytime a taxable event occurs in a retirement account, the financial institution provides the employee and IRS a 1099-R to report the distribution.  Not only will this form report the amount of the distribution, it will also provide a reason code in Box 7.  “Code 3” constitutes a distribution reason of Disability, signaling the distribution will not be subject to the 10% penalty.

4. Form 5329

When claiming an exception to the 10% early withdrawal penalty, you will need to provide the IRS information documenting your claim. This is done by filing IRS Form 5329 with your tax return.  For the Disability exception, you should submit a physician’s signed certification confirming the severity of the disability.  This certification is customarily accepted as proof by the IRS.