Unlocking Disabled Veterans' Tax Exemption: Qualified Distributions from Roth IRAs
1Q 2025
At Hof Law, we take pride in exploring complex intersections between Federal tax law and veterans' benefits law to better serve our clients. One recent area of focus involves the potential tax exemption of Roth Individual Retirement Account (IRA) distributions when a client is living with a mental health disability recognized by Veterans Affairs (VA) under 38 C.F.R. §4.130.
The Interplay Between Disability Law and Tax Law
Under 26 U.S.C. §72(m)(7), a distribution from a Roth IRA may be exempt from Federal taxation if the account holder is "disabled." Separately, many veterans' mental health conditions are rated under 38 C.F.R. §4.130, which governs VA's schedule of ratings for mental disorders. Through careful legal analysis, we have found that qualifying disabilities under VA regulations can, in some cases, satisfy the Internal Revenue Code's definition of disability. This can potentially make certain Roth IRA distributions qualified and tax-free under Federal law.
Important Caveats and Individualized Analysis
Every individual's circumstances are unique. Whether a distribution qualifies as tax-exempt will depend heavily on:
The nature and severity of the transfer or withdrawal of funds from a qualified Roth IRA;
How a veteran's disabilities under VA regs align with Federal tax definitions under the code; and,
The concluding state of the money, and other Roth IRA requirements or relevant facts and outcomes under tax law.
Hof Law must stress that Hof Law does not offer tax preparation services, nor are we enrolled agents or Certified Public Accountants accredited before the IRS to prepare or file tax returns on behalf of clients. However, the firm can provide legal advice and general guidance regarding how veterans' benefits law may interplay with Federal tax rules, and Hof is happy to support clients and their tax preparers in navigating these complex issues.
Why This Matters
For veterans, recognizing that a service-connected mental health disability might impact their tax obligations can lead to significant financial relief from Federal tax liabilities. A properly structured, well-documented understanding of one's disability and Roth IRA history can unlock tax-exempt distributions that might otherwise have been mistakenly treated as taxable.
If you are a veteran or advising a veteran, and would like to explore whether these considerations apply to your situation, Hof Law may be able to assist you.
Contact the firm to learn more about this important topic and how we can support veterans in optimizing their legal and financial well-being.
(Disclaimer: This spotlight project is intended for informational purposes only and does not constitute individualized legal or tax advice. Consult a qualified tax professional for specific tax preparation services.)