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Permanently disabled

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Level 1
last updated ‎February 16, 2020 10:20 PM

I have a client who is now totally and permanently disabled. He withdrew money from his IRA, which isn't taxable because he's deemed disabled, Charles Schwab put distribution code 1 and they said they won't change it because it can be handled on the tax return. Where/how do I do i make the withdraw non taxable?

Jaime

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3 Replies 3
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Level 4
last updated ‎February 16, 2020 10:20 PM

I'm not sure why you believe that permanent and total disability renders IRA withdrawals as nontaxable. I think you're referring to the 10%-penalty for early withdrawal (which results from Code 1 on the 1099-R). To indicate the taxpayer is not subject to the 10%-penalty, use Form 5329. Scroll down and find Line C for the input blank to remove the 10%-penalty. Also, be sure to acquaint yourself with the tax code's definition of "permanent and total disability." It's defined much more strictly than most people would assume.

 

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Level 7
last updated ‎February 16, 2020 10:20 PM

The IRA distribution will be taxable, but the distribution amount should qualify for the10% penalty exclusion due to a disability. Use form 5329 and it's instructions. 

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Level 15
Level 15
last updated ‎February 16, 2020 10:20 PM

A distribution from a pretax retirement account will always be taxable, its the penalty for early withdrawal that can be waived in certain situations.


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