by John Darer® CLU ChFC MSSC CeFT® RSP CLTC
A new IRS Private Letter Ruling gave a disabled taxpayer relief by permitting withdrawals of unequal periodic payments from the taxpayer's IRA.
The taxpayer has multiple sclerosis and is unable to engage in any substantial gainful activity because of the physical impairment resulting from this sickness.
- IRC Section 72 imposes a 10% penalty tax on certain early distributions from qualified retirement plans such as IRA, 401(k) etc. The penalty is imposed on distributions prior to age 59 1/2.
- IRC 72(t)(2) (iii) provides an exception to the the tax when distributions are attributable to disabled individuals within the meaning of IRC 72 (m)(7)
- IRC 72(t)(2)(iv) provides an exception when distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his or her designated beneficiary.
- IRC 72(m)(7) provides that an individual shall be considered to be disabled if he or she is unable to engage in any substantial gainful activity by reason of any physical or mental impairment which can be expected to result in death or to be continued and indefinite duration.
Settlement Planning Issues for Discussion
The either "72(m)(7) disabled" OR "substantially equal periodic payments" exception afforded to disabled IRA owners and qualified plan distributees appears to apply to holders of modified endowment life insurance contracts (see IRC 72(v)(2)(B)) and 72(v)(2)(C), but DOES NOT appear to apply to holders of annuities.
IRC 72(u) imposes a similar 10% penalty tax on withdrawals from annuities prior to age 59 1/2. The exceptions relevant to plaintiffs are:
- If annuity contract acquired by estate of decedent by reason of death of decedent 72(u)(3)(A)
- If annuity is held under a plan described in section 401(a) or 403(a), under a program described in section 403(b), or under an individual retirement plan, 72(u)(3)(B)
- A qualified funding asset, defined in IRC 130(d) , but without regard to whether or not there is a qualified assignment 72(u)(3)(C)
- Is an immediate annuity 72(u)(3)(E)- which requires
- a single premium;
- a start date of no later than one year from the date of purchase of the annuity; and
- the "substantially equal periodic payment requirement".
Please consider these issues when making settlement planning recommendations to disabled tort victims that include non structured deferred annuities.
For more information contact John Darer at 888-325-8640