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Early Distribution -- Divorce & Disabled

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

Reply to
wrldruler
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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.

Reply to
Alan

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.

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?

Reply to
Phil Marti

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?

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?

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

Reply to
wrldruler

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

Reply to
D. Stussy

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