The tax code generally assesses a 10% penalty on distributions from qualified plans, including IRAs, before age 59 1/2. But as many advisors and even many clients know, there are a number of exceptions to this rule. The disability exception applies to distributions from employer plans and IRAs, but what exactly does disabled mean under the Tax Code?

The code's definition of a disabled person is actually quite limiting. Many taxpayers have been surprised by the restrictive provision of section 72(m)(7): "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 stipulated by law. Collecting a disability pension is not sufficient to qualify for the exemption.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access