Slott Report Mailbag: Can I Take an IRA Distribution Before Age 59 1/2 If I Am Disabled?

This week's Slott Report Mailbag includes questions on whether an employer plan allows for distributions and rollovers when an employee stops working for that employer, how to compute the taxes on an IRA and an inherited IRA and whether or not a disabled individual can take an IRA distribution before a certain age. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


1.

Send questions to [email protected]

My wife recently quit working for Hampton University and requested that her 100% vested 403(b) funds be rolled over from her TIAA-CREF 403(b) account to her Vanguard IRA. She was told that Hampton University did not permit rollovers of 403(b) accounts until employees reached age 65. Is this legal?

Answer:
Yes. Although many 403(b) plans allow a distribution and subsequent rollover when an employee stops working for that employer (known as separation from service), they don’t have to. Check the terms of her former employer’s plan to make sure that she cannot take a withdrawal until age 65. This provision would be spelled out in the plan document or summary description.


2.

To Whom It May Concern:

I would like to convert my Traditional IRA to a Roth IRA. I need to determine how much taxable income I will have if I convert.

I have a Traditional IRA with a fair market value of $50,000 and a cost basis of $35,000. I also have an inherited IRA with a market value of $30,000 and a cost basis of $0.

How is the taxable amount computed?

Sincerely,

JS Brown
Tucson, Arizona

Answer:
The taxable amount of your IRA and the inherited IRA are treated as two separate IRAs and are not combined for tax purposes. Because your IRA has basis, each dollar withdrawn from the IRA will contain a percentage of tax-free and taxable funds based on the percentage of after-tax funds to the entire balance in all your IRAs (including SIMPLE and SEP IRAs). Do not include the inherited IRA in this calculation.

The calculation is done on IRS Form 8606, which must be filed with your tax return. You cannot convert your inherited IRA to an inherited Roth IRA.

3.

I heard that if you are disabled, you can take money out of your IRA before you are age 59 ½.
What are the guidelines to do this?

Thanks,

Ron

Answer:
A disabled person can take out IRA money before age 59 ½ without having to pay the 10% penalty. The distribution will still be taxable though. The tax code’s definition of a disabled person is actually quite limiting. A person is 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.

Article Highlights

• Employer plans dictate whether or not you can take a distribution and subsequent rollover before a certain age if you separate service. Check the plan documents.
• The taxable amounts of a person's IRA and inherited IRA are treated as two separate IRAs
• A disabled person can take out IRA money before age 59 ½ without having to pay the 10% penalty, but the distribution will still be taxable.  Also, that person must meet the tax code's strict definition of a disabled person.

- By Joe Cicchinelli and Jared Trexler

Posted in: 403(b) plans,disability,Ed Slott,ed slott ira,financial,financial advisor,Inherited IRAs,IRA distributions,IRA rollovers,joe cicchinelli,Mailbag,Retirement,taxes