Apr 2, 2008

Q & A: Exceptions to 10% Penalty on Early Withdrawals

QUESTION: In March of 2007 I became totally disabled at the age of 54. I am receiving Long Term Disability from my employer which was reduced by the amount of Social Security I began receiving in late 2007. To make ends meet, my wife and I withdrew all of our 401K funds and although taxes were taken out of the early withdrawal it appears that we will still owe a 10% penalty on the early distribution. Is there any tax relief for early withdrawal of a 401K plan if disability was involved for the purpose of the withdrawal?

ANSWER: There is good news and not-so-good news here. Unfortunately, disability is not one of the exceptions to the taxation of qualified retirement plan distributions. The taxable distribution amount may be reduced by the following:
1) after-tax contributions made to the plan by the plan participant
2) any repayments of loans from the plan that were included the plan participant's gross income
3) the current actuarial value of any annuity contract that was included in the plan participant's distribution.
In contrast, you are exempt from the 10% early-withdrawal penalty on the distribution. Exceptions to the 10% penalty are made for distributions:
1) upon death or disability of the participant,
2) after separation of service that are part of a series of substantially equal periodic payments over the life of the participant,
3) after the participant's separation of service, provided the participant had reached the age of 55,
4) to a non-participant under a qualified domestic relations order,
5) not exceeding deductible medical expenses,
6) of ESOPs of dividends on employer securities,
7) made on account of the IRS's levy against the participant's account,
8) qualified hurricane distributions, and
9) qualified reservist distributions.

0 responses:

  © Blogger templates The Professional Template by Ourblogtemplates.com 2008

Back to TOP