From: Vacaville, CA

Dear TaxMama,

I'm under the age of 59.5, but need to withdraw my 401k funds due to medical bills and just general living expenses. I'm now on permanent Social Security Disability and have been unemployed since 1999.

It is my understanding that I must pay early withdrawal penalties on the funds and cannot withdraw them under the heading of "Disability", thus avoiding the penalty, as I'm no longer an employee of the company.

Would you please tell me if that is correct? I can't seem to find a clear answer anywhere and I'm not confident about the information I'm receiving.

Thank you.

Merle

 

 

Dear Merle

Aw, how awful!

But, at least if you draw money from a 401(k) plan or IRA you won't have to pay the early withdrawal penalties.

Tell the clerk, or fill it in on the form, that you are permanently disabled.

They will put a code on the 1099-R - Code 3 - which will mean early withdrawal, no penalty due to disability.

Don't worry, if they issue it wrong, you can correct it on your tax return and attach an explanation.

The one good thing about being disabled is that YOU'RE now in control of when and how you take your draws from your account.

Through all of this - and some of the things to come over the next few months, you'll be in for quite an education. Pay attention to details and you'll learn a lot about medical billing, taxes and nit-picky little things.

Just one thing - keep your sense of humor.

It may be tough, sometimes, but that's what will make it all fun, instead of miserable.

And since you tell me that your administrators refuse to cooperate on this, you have one more option.

Open an IRA somewhere, where they're nice to you.

And roll over the ENTIRE account to the new IRA.

Then it no longer matters what how closed-minded and unhelpful that financial company is.

Best Wishes,
Eva Rosenberg, MBA, EA