The Internal Revenue Service (IRS) rules for individual retirement accounts (IRAs) do not allow you to borrow money from an individual retirement account under any circumstances, including a disability. In addition, you cannot use your IRA as collateral. However, if you need money because of a permanent disability, you can take an early distribution from your IRA without paying an early withdrawal penalty. If you take a distribution from a Roth IRA that is at least five tax years old because of a permanent disability, your distribution comes out tax-free because the IRS treats it as a qualified distribution.
1. Request a distribution from your IRA from your financial institution. Your financial institution does not need any proof of your disability because you can remove money from your IRA whenever you want.
2. Complete Form 8606 to determine the taxable portion of your distribution if you are taking a withdrawal from a Roth IRA that has not been open for at least five tax years. When you take a nonqualified Roth IRA distribution, you take out all contributions first and then remove the earnings. Only the earnings are taxable. If you are taking the money from a Roth IRA that you made your first contribution to at least five years ago, you do not need to complete Form 8606 because you are taking a qualified distribution and the entire distribution is tax-free.
3. Complete Form 5329 to record your permanent disability exception to the early withdrawal penalty. If you are taking the money from a Roth IRA that you made your first contribution to at least five years ago, you do not need to complete Form 5329 because you are taking a qualified distribution. On the form, write "03" next to line 2, which is the code for an exception due to a permanent disability.
4. Report the taxable portion of your IRA withdrawal on line 15b of Form 1040 and the nontaxable portion on line 15a. If you take money out of a traditional IRA, or a nonqualified distribution of earnings from a Roth IRA, you avoid the early withdrawal penalty but not the income taxes on the distribution.
Items you will need
- IRS Form 5329
- IRS Form 1040
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