I’ve mentioned before that some of us don’t have retirement plans. Because of this, a few members of our elite demographic may not be aware of the difference between a Traditional IRA and a Roth IRA (I’m not even getting into backdoor, SEP or SIMPLE IRAs here). In case you don’t know (and this will be vaguely important later), let’s get real quick and dirty:
Traditional IRA: you pay taxes when you retire and withdraw the funds. – Theblance.com
Roth IRA: you pay the taxes now, before you contribute to your plan. – Thebalance.com
What these two retirement plans have in common is that, while you can withdraw your cash at any time, you could get dinged with a “10% penalty and a tax bill if you take out your money before age 59-1/2” (Nerdwallet.com). Like every rule in the book, there are certain exceptions. For example, you might be able to avoid penalties for early withdrawal if you use the cash for medical bills, higher education, first time home buying and disabilities (Thebalance.com). However, to claim an exemption for a disability, you must “have your doctor certify that you are completely and permanently disabled” (Thebalance.com) and unable to work enough to support yourself.
In 2018, Kathryn Gillette tried to test out the disability exception with the US Tax Court. Ms. Gillette had been a soldier, worked as a firefighter, owned rental properties and was married to a cop. Kind of seems like an upstanding, law-abiding couple, right? And they probably would have stayed that way, but then Ms. Gillette was diagnosed with Restless Leg Syndrome. To combat her affliction, she was put on medication (Accountingweb.com). According to The Mayo Clinic, these medications “increase dopamine in the brain.” One of the short-term side effects of the increase causes “impulse control disorders, such as compulsive gambling.”
And did Ms. Gillette gamble? Let’s just say she was worse than Worm in the 1998 film, “Rounders”. For example, early one day, she won $162,000. By the end of that day, it was gone. Her rental property fees went to casinos, she hit up friends (and didn’t pay them back), she stole from her husband and, finally, she withdrew money from her IRA in 2012 (Accountingweb.com).
When it came time to file her tax return, Gillette maintained she wasn’t responsible for the IRA penalty because of her affliction (Accountingweb.com). The Tax Court decided that “her condition didn’t prevent her from doing regular activities” (The Kiplinger Tax Letter, Vol. 95, No. 3). Earning and losing $162,000 in a day isn’t exactly regular, but I get their point. Also, the Tax Court said that her “disability” was of a short-term nature: stop with the drugs and you’re A-OK, basically.
Chances are, you won’t suffer from drug-induced impulse control issues this year. However, emergencies happen and you might be tempted to cash out your IRA early. Before facing penalties, why not meet with your Bourke Accounting tax preparer or bookkeeper? Bourke Accounting doesn’t have a magic word to make your troubles disappear, but they can offer knowledgeable insight into ways to avoid touching your retirement.
Written by Sue H.