Early 401 withdrawal awaiting disability retirement

[tjcksn68]

My wife is in the process of a disability retirement. She made an early withdrawal of her 401k to cover expenses until it is finalized. Can I can claim it for permanent disability or something else, or do we take the big tax hit?

[ColeenD3]

If you qualify for an exception, you can avoid the 10% penalty.

There are certain exceptions to this additional 10% tax. The following six exceptions apply to distributions from any qualified retirement plan:

• Distributions made to your beneficiary or estate on or after your death.
• Distributions made because you're totally and permanently disabled.
• Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
• Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income (7.5% if you or your spouse is age 65 or over) whether or not you itemize your deductions for the year.  For more information on medical expenses, refer to Topic 502.
• Distributions made due to an IRS levy of the plan under section 6331.
• Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (state or local government) who separated from service in or after the year you reached age 50.
2. Distributions made to an alternate payee under a qualified domestic relations order, and
3. Distributions of dividends from employee stock ownership plans.

@tjcksn68

[tjcksn68]

My wife is permanently disabled and awaiting disability retirement. She's in her mid-40's. She took the early withdrawal to cover our expenses while her retirement is finalized. So I could claim this for those reasons, correct?

[DavidS127]

Yes, if your wife's distribution due to a total and permanent disability, it qualifies to avoid the 10% additional tax.  The distribution itself, however, will be included in your taxable income.