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Subject Author Date
Early Distribution -- Divorce & Disabled wrldruler 02-04-2008
Posted by wrldruler on February 4, 2008, 4:29 pm
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 Hi,

My father-in-law became "permanently and totally disabled" a few years
ago. I think he is 55.

This morning, he officially became divorced and was awarded $38,000
from his now ex-wife's Thrift Savings Plan (Federal Retirement).

He doesn't want to do a roll-over. He wants to take the cash and run.

TSP says they are going to take 20% Fed withholding no matter what.
That's fine. He might be able to get that back at the end of the year
when I file his taxes.

But I am wondering about the 10% early-withdrawal penalty.

I realize that Exception 3 of the Form 5329 allows one to avoid the
penalty if "Distributions due to total and permanent disabilty"

But he is getting this distribution because he is getting divorced,
NOT because he became disabled.

Yet, he IS disabled, so I (personally) don't think he deserves to be
taxed.

Any suggestions?

Thanks,

Chris

--
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Posted by Alan on February 4, 2008, 6:14 pm
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 wrldruler wrote:
> Hi,
>
> My father-in-law became "permanently and totally disabled" a few years
> ago. I think he is 55.
>
> This morning, he officially became divorced and was awarded $38,000
> from his now ex-wife's Thrift Savings Plan (Federal Retirement).
>
> He doesn't want to do a roll-over. He wants to take the cash and run.
>
> TSP says they are going to take 20% Fed withholding no matter what.
> That's fine. He might be able to get that back at the end of the year
> when I file his taxes.
>
> But I am wondering about the 10% early-withdrawal penalty.
>
> I realize that Exception 3 of the Form 5329 allows one to avoid the
> penalty if "Distributions due to total and permanent disabilty"
>
> But he is getting this distribution because he is getting divorced,
> NOT because he became disabled.
>
> Yet, he IS disabled, so I (personally) don't think he deserves to be
> taxed.
>
> Any suggestions?
>
> Thanks,
>
> Chris
>
There are two exceptions that seem to fit your f-i-l. 1. He was
probably awarded the pension under a qualified domestic relations
order as that is usually how a divorced spouse gets a share of
the pension. Or, 2. He is taking the distribution in a lump-sum
because he is totally and permanently disabled.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Phil Marti on February 5, 2008, 9:47 am
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"wrldruler" wrote:

> My father-in-law became "permanently and totally disabled" a few years
> ago. I think he is 55.
>
> This morning, he officially became divorced and was awarded $38,000
> from his now ex-wife's Thrift Savings Plan (Federal Retirement).
>
> He doesn't want to do a roll-over. He wants to take the cash and run.
>
> TSP says they are going to take 20% Fed withholding no matter what.
> That's fine. He might be able to get that back at the end of the year
> when I file his taxes.

If he wants to avoid withholding he can roll the TSP distribution directly
into a traditional IRA, then take the cash and run. Withholding is not
mandatory from IRA distributions.

> But I am wondering about the 10% early-withdrawal penalty.
>
> I realize that Exception 3 of the Form 5329 allows one to avoid the
> penalty if "Distributions due to total and permanent disabilty"
>
> But he is getting this distribution because he is getting divorced,
> NOT because he became disabled.
>
> Yet, he IS disabled, so I (personally) don't think he deserves to be
> taxed.

As for the penalty, his disability qualifies him for the exception
regardless of how he takes the distribution. You do realize that it's still
taxable income, right?

--
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by wrldruler on February 5, 2008, 1:34 pm
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> If he wants to avoid withholding he can roll the TSP distribution directly
> into a traditional IRA, then take the cash and run.  Withholding is not
> mandatory from IRA distributions.

I thought about this. But isn't there a 5-year waiting period for
withdrawing traditional IRAs??? Or will his pre-existing disablity
exempt him from this?

> As for the penalty, his disability qualifies him for the exception
> regardless of how he takes the distribution.  

So he will get a 1099-R from TSP showing No Exception (#1). And I just
file Form 5329, marking Exception 3? Result is 0 penatly?

>You do realize that it's still
> taxable income, right?

Yes, I realize this will be taxable income. I think it might be best
to allow the 20% automatic withholding (save him from himself). That
is, unless I can predict his tax due at the end of the 2008 tax year
will be far less than 20% -- due to his low income bracket, various
credits, events such as house purchase, etc.

Thanks,

Chris

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by D. Stussy on February 5, 2008, 4:31 pm
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> > If he wants to avoid withholding he can roll the TSP distribution
directly
> > into a traditional IRA, then take the cash and run. Withholding is not
> > mandatory from IRA distributions.
>
> I thought about this. But isn't there a 5-year waiting period for
> withdrawing traditional IRAs??? Or will his pre-existing disablity
> exempt him from this?

There is a 5 year period connected with ROTH-IRAs - maybe that's what you're
thinking of?

> > As for the penalty, his disability qualifies him for the exception
> > regardless of how he takes the distribution.
>
> So he will get a 1099-R from TSP showing No Exception (#1). And I just
> file Form 5329, marking Exception 3? Result is 0 penatly?
>
> >You do realize that it's still
> > taxable income, right?
>
> Yes, I realize this will be taxable income. I think it might be best
> to allow the 20% automatic withholding (save him from himself). That
> is, unless I can predict his tax due at the end of the 2008 tax year
> will be far less than 20% -- due to his low income bracket, various
> credits, events such as house purchase, etc.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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