If you become totally and permanently disabled, the IRA disability exception lets you withdraw money from your IRA before age 59½ without owing the 10% early distribution penalty. The rule sits in Internal Revenue Code §72(t)(2)(A)(iii), and the definition of “disabled” it relies on is narrower than what private disability insurers use and narrower than some Social Security determinations. Claiming it correctly means matching that definition, keeping the right documentation, and reporting the distribution the right way on your return.
What the IRS Means by Disabled
The definition comes from IRC §72(m)(7). You qualify if you cannot engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or to last for a long, continuous, and indefinite period.1Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Every phrase carries weight.
“Any substantial gainful activity” is the piece that catches people. You don’t qualify just because you can no longer do your prior job. If your condition still allows some other meaningful paid work, the exception doesn’t apply. “Medically determinable” means a physician can identify and document the impairment through clinical findings, not just your description of symptoms. And the duration requirement rules out temporary conditions: a broken leg, a surgery with an expected full recovery, or a treatable illness with a defined timeline won’t qualify, however debilitating right now.
SSDI Approval Is Not Automatic Qualification
Being approved for Social Security Disability Insurance does not by itself mean you meet the IRS standard. The two agencies use similar but not identical criteria. Someone the SSA classifies as likely to improve medically may not satisfy the IRS requirement of “long-continued and indefinite duration.”1Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Private long-term disability policies are further off, since they often turn on inability to perform your specific occupation, which is a lower bar than “any substantial gainful activity.”
SSDI approval is useful supporting evidence, and many people who receive it will also meet the IRS test. But the medical documentation still needs to speak to the IRS definition on its own terms.
The Physician’s Statement
The statute requires proof “in such form and manner as the Secretary may require.”1Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts In practice, get a written statement from your physician that addresses each element of the IRS definition:
- The specific diagnosis, identified through medical testing or clinical examination.
- Functional limitations showing the condition prevents any substantial gainful activity, not just your prior occupation.
- Expected duration, confirming the impairment can be expected to result in death or last continuously with no foreseeable endpoint.
You keep this statement in your own records. You don’t send it in with your return, and you don’t give it to your IRA custodian. The IRS only asks to see it if your return is examined, and if that happens without documentation, the penalty gets assessed retroactively with interest. The determination must be established at the time of the distribution, not based on a condition that worsened later. IRS Publication 590-B notes one clear limit: a physician cannot certify their own disability.2Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
If the Department of Veterans Affairs has certified you as having a permanent and total disability, that certification may substitute for a separate physician’s statement. VA Form 21-0172 exists for this purpose.
Which Accounts and How Much
The exception applies to all common IRA types: Traditional, Roth, SEP, and SIMPLE.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions There is no cap on the amount you can withdraw. A single lump sum, several partial withdrawals, or draining the account are all permitted, as long as each distribution is taken while the disability condition exists.
Roth IRAs Get Better Treatment
For Roth account holders, the exception can make the whole withdrawal, earnings included, completely tax-free. Under IRC §408A(d)(2)(A)(iii), a distribution made because of a disability that meets the §72(m)(7) definition counts as a “qualified distribution,” which is excluded from gross income entirely.4Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs
There is one condition: the five-year holding period must be satisfied. The clock starts on January 1 of the first tax year you (or your spouse) made any contribution to any Roth IRA. If your first Roth contribution was in 2022, the five-year period ends January 1, 2027. A withdrawal before that date is not a qualified distribution even with a qualifying disability. The 10% penalty is still waived, but the earnings portion is subject to ordinary income tax.4Office of the Law Revision Counsel. 26 U.S.C. 408A – Roth IRAs
For Traditional IRA distributions, waiving the penalty does not change income tax treatment. The full taxable amount is ordinary income in the year you receive it.
Requesting the Distribution
Contact the brokerage, bank, or financial institution that holds your IRA. They provide a distribution request form on which you indicate that the withdrawal qualifies for a penalty exception due to disability. The custodian processes the paperwork; they do not verify your medical condition or review the physician’s statement, and that burden stays with you.
When you claim an exception, the custodian will not withhold the 10% penalty. They will withhold federal income tax at a default 10% rate on the nonperiodic distribution unless you file Form W-4R to choose a different rate, anywhere from 0% to 100%.5Internal Revenue Service. Pensions and Annuity Withholding Electing 0% is an option if you need the full amount now, but the income tax still comes due at filing.
Reporting the Exception on Your Return
By January 31 of the year after your withdrawal, the custodian sends you Form 1099-R.6Internal Revenue Service. Publication 1099 – Guide to Information Returns Look at Box 7. A disability distribution should carry distribution code 3, which signals the penalty waiver to the IRS.7Internal Revenue Service. Instructions for Forms 1099-R and 5498 If Code 3 is there, you generally don’t need to file Form 5329.
Custodians often default to Code 1 (early distribution, no known exception) when they haven’t verified a disability claim. If you see Code 1 on your 1099-R, you must file Form 5329 with your Form 1040 or 1040-SR to claim the exception yourself. On Part I, enter the distribution amount on line 1, enter the same amount on line 2 with exception number 03 (total and permanent disability), and the result on line 3 is zero.8Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Skipping this step when your 1099-R shows Code 1 is how the IRS automatically bills you for the penalty: their system sees an early distribution with no exception and generates the assessment.
Other Tax Effects to Plan For
Avoiding the 10% penalty is the headline, but a sizable withdrawal still creates other tax consequences worth planning around, especially if you’re managing a tight budget or government benefits.
A Traditional IRA distribution raises your adjusted gross income for the year. Higher AGI can push your “combined income” above the thresholds where Social Security disability benefits become partially taxable. For single filers, combined income above $25,000 can make up to 50% of SSDI benefits taxable, and above $34,000, up to 85%. For married couples filing jointly, those thresholds are $32,000 and $44,000.
The same AGI increase affects Modified Adjusted Gross Income for Affordable Care Act premium tax credits. If you’re buying marketplace coverage after leaving work due to disability, a large Traditional IRA distribution can shrink or eliminate your subsidy for the year. Roth IRA qualified distributions don’t count toward AGI, one more reason the Roth treatment matters.
State income tax is a separate question. Some states tax IRA distributions and not all conform to the federal disability exception. If you live in a state with an income tax, confirm your state’s treatment before assuming you’ll owe nothing beyond the federal bill.