Husband’s Early IRA Distribution Penalized Despite Wife’s Disability

Distributions from an IRA prior to age 59 ½ are subject to a 10% early distribution penalty. However, the penalty is waived if an exception to it applies. One exception is for disability. But, as a recent case illustrated, the disability must be that of the IRA owner and not of the spouse.

In the case, a husband took a distribution from his IRA before age 59½. He included the distribution in income but did not report the 10% penalty, claiming he didn’t owe it because his wife was disabled at the time. The Tax Court rejected his argument and assessed the penalty (Tracey Rene Merrell, TC Summary Opinion 2020-5). The IRA was maintained for his benefit, and he was not disabled at the time of the distribution.

Note: The court also rejected their argument that they’d suffer economic hardship from the penalty. There is no exception to the early distribution penalty for economic hardship and the court does not have equitable authority to grant relief.