Disability and Early Access to Retirement Funds

Internal Revenue Code §72(t) imposes a 10% additional tax on distributions from qualified retirement plans and IRAs before age 59½. Section 72(t)(2)(A)(iii) provides an exception for distributions "attributable to the employee's being disabled within the meaning of subsection (m)(7)." The definition is more restrictive than the Social Security disability standard, the documentation must be contemporaneous, and SECURE 2.0 added several adjacent exceptions that have eroded the practical importance of the §72(t)(2)(A)(iii) pathway.

The §72(m)(7) disability definition

Section 72(m)(7) defines disability for §72(t) purposes:

"An individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration."

The standard borrows heavily from Social Security's definition but is independent. Receipt of Social Security Disability Insurance is strong but not dispositive evidence. The taxpayer must furnish proof of disability in such form and manner as the IRS may require — usually a physician's certification contemporaneous with the distribution, retained for the records.

Worked example: stage IV cancer diagnosis at age 54

A 54-year-old executive is diagnosed with stage IV pancreatic cancer in March 2025. Treatment costs and reduced income require IRA withdrawals of $80,000 in 2025. The diagnosis qualifies as a disability under §72(m)(7): medically determinable, expected to result in death or to be of long-continued and indefinite duration.

• Tax treatment: $80,000 included in ordinary income. 10% additional tax under §72(t) does not apply. Federal income tax (marginal 24% bracket): approximately $19,200. Penalty saved: $8,000.
• Documentation: Treating physician's letter certifying the diagnosis and prognosis. File Form 5329 with the 2025 return, claiming exception code 03 (Disability).
• Custodian reporting: The custodian will report the distribution on Form 1099-R with distribution code 1 (early distribution, no known exception). The exception is claimed by the taxpayer on Form 5329, not adjusted by the custodian.

Other relevant §72(t) exceptions

• Death of the participant (§72(t)(2)(A)(ii)). All distributions to a beneficiary after death are exempt.
• Terminally ill individual (§72(t)(2)(L)), added by SECURE 2.0 §326. Distributions to a terminally ill individual (certified life expectancy of 84 months or less) are exempt from §72(t). May overlap with disability exception; documentation requirements differ.
• Public safety officers separating from service (§72(t)(10)). Available to qualified public safety employees separating from service in or after the year they reach age 50, or — as expanded by SECURE 2.0 §308 — at any age after 25 years of service with the employer sponsoring the plan, whichever comes first. SECURE 2.0 also extended the exception to private-sector firefighters and to certain corrections officers and forensic security employees.
• Domestic abuse victim (§72(t)(2)(K)), added by SECURE 2.0 §314. Up to lesser of $10,000 (indexed) or 50% of vested balance; self-certified.
• Federally declared disaster (§72(t)(11)), added by SECURE 2.0 §331. Up to $22,000; three-year repayment window.
• Emergency personal expense (§72(t)(2)(I)), added by SECURE 2.0 §115. One distribution per year up to $1,000; self-certified.
• Long-term care insurance premium (§72(t)(2)(N)), added by SECURE 2.0 §334. Up to $2,500 per year (indexed) effective 2026.
• Substantially equal periodic payments (§72(t)(2)(A)(iv)). The SEPP / 72(t) program, requiring at least 5 years or until 59½. Covered in our 72(t) SEPP article.
• Medical expenses exceeding 7.5% AGI (§72(t)(2)(B)). Available to anyone.
• Higher-education expenses (§72(t)(2)(E)) — IRAs only.
• First-time home purchase (§72(t)(2)(F)) — IRAs only, up to $10,000 lifetime.
• Birth or adoption (§72(t)(2)(H)). Up to $5,000 per child.

Common mistakes

• Assuming Social Security Disability automatically qualifies. It is strong evidence but the IRS may inquire separately. Keep medical documentation.
• Claiming the exception without contemporaneous medical records. The disability must exist at the time of distribution; later diagnosis does not retroactively cure pre-disability distributions.
• Forgetting Form 5329. The custodian's 1099-R will not reflect the exception. Without Form 5329 (or with the wrong code), the IRS assesses the 10% additional tax.
• Overlooking the long-term-care premium exception starting in 2026. A planned $2,500 annual distribution to fund LTC premiums is penalty-free even before 59½.
• Confusing the disability exception with hardship withdrawal. A 401(k) hardship withdrawal is a plan-level relaxation of distribution restrictions; it is not a §72(t) exception. Hardship withdrawals to under-59½ participants are still penalty-taxed unless an exception applies.

Sources

• Internal Revenue Code §72(t), additional tax on early distributions: law.cornell.edu/uscode/text/26/72
• Internal Revenue Code §72(m)(7), disability definition: law.cornell.edu/uscode/text/26/72
• SECURE 2.0 Act of 2022, Pub. L. 117-328, Division T, §§115, 308, 314, 326, 331, 334: congress.gov/bill/117th-congress/house-bill/2617
• IRS Publication 590-B, Distributions from IRAs: irs.gov/pub/irs-pdf/p590b.pdf
• IRS Form 5329 Instructions: irs.gov/pub/irs-pdf/i5329.pdf

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