401k – disability no penalty withdrawals

[light trip]

There are a lot of people on this website that are on social security disability, I'm one of them. I learned this week that the IRS allows for early withdrawal of 401k funds (along with some other retirement accounts) without a tax penalty if you are disabled and can not work. There are other circumstances that can also allow for early withdrawal of retirements funds without a tax penalty if you're not disabled, such as “hardship” that some may want to investigate as well.

So the next question to myself when I learned of this is; does social security disability count early withdrawal of 401ks and other retirement accounts as income and will they deduct money from your disability payment? As near as I can tell the answer is no. This because social security disability does not consider an early withdrawal of retirement funds as “earned income” under their rules, eventhough this is money you may have deposited from money you made while working.

This can be complicated and one website I read recommends you get a certified public accountant (CPA). One reason is because who ever distributes a retirement fund will use a code in a tax form at the end of the year that tells the IRS what kind of withdrawal was made from the 401k (or other qualifying retirement fund) that will indicant if a tax penalty is owed to the IRS by you. There are also steps a CPA can take to help you change this code if it was done incorrectly.

Circumstances: On a personal note, I'm fine because my wife works and I do have a very small 401k. My wife and I have talked about what I would do if anything happened to her. I now know, being disabled that I could use my small 401k too buy a used van, utility trailer or RV and move to the southwest. If something should happen to her, this would also be a harship.

Here are two websites you may find helpful:
http://budgeting.thenest.com/withdraw-401k-early-due-permanent-disability-penalty-25437.html

http://finance.zacks.com/401k-money-counted-earned-income-social-security-2538.html

 

[cyndi]

Read the fine print. You have to prove, not that you are disabled, but that you needed the money due to your disability. The fact that you're unable to work, pay your bills or feed yourself is inconsequential.

Needing the money might mean something like building a wheel chair ramp/making your home accessible or purchasing an accessible vehicle.

 

[offroad]

Proof is also age related. If you are over 55 for many funds you can get your money. No awaiting 59.

 

[light trip]

I've certainly been wrong more times in my life then I can count. But in everything I read, nothing states that you are required to use an early withdrawal of a retirement fund for a specific purpose to qualify for no tax penalty. I also didn't see anything that was age related. But I'm glad these have been brought up for anyone considered going this rout.

If I where to do this I would use a tax professional. I would also pay all penalties upfront then attempt to get them refunded at the end of the year when I file. That way if I owe anything I've already paid.

Proof of my disability has already been provided by the government. Anyone that's disabled and has an on-line account with SS can go to the website and download a PDF letter that is proof of their disability and income. Hardship would much more a judgment call, I would think.

I keep a copy of this letter with me (that I have redacted myself to black out the last four of my SS# shown on the letter and income) in case I need proof of my disability.

Although, the Justice Department under the Civil Rights Division states that anyone you state that you are disabled, must take your word for it that you are in fact disabled. This includes retail stores, restaurants, security, police and any other law enforcement.

 

[light trip]

It should also probably be noted here that even of you don't owe a penalty, you will owe taxes on the money you withdrawal from a tax deferred account. One way to look at it, if you didn't pay taxes on the money that was put into an account (weather it was you or an employer) you will owe taxes on the money when you withdrawal it.

Getting a CPA is good avice.

 

[offroad]

It should also probably be noted here that even of you don't owe a penalty, you will owe taxes on the money you withdrawal from a tax deferred account. One way to look at it, if you didn't pay taxes on the money that was put into an account (weather it was you or an employer) you will owe taxes on the money when you withdrawal it.

Getting a CPA is good avice.

Taxes at a much lower rate. Since your annual taxable income should be half of what your original income was.