I qualified for SSDI in May of 2020. I withdrew money in 2021 from my 401k. I turned 59 1/2 in 2021. I am on permanent disability and receiving Social Security. My 1099-R Box 7 had a 1 in it for early distribution. Can I use code 3 which is disability to save on the 10% tax penalty for this withdrawal? This is quite confusing on what determines total disability, but I had a hearing to qualify for SSDI and Judge found me permanently disabled and qualified for SSDI benefits.
Make sure that you maintain records of your disability assessment should you have to prove your status to a tax authority.
Code 3 - Totally and permanently disabled qualifies for an exception to the 10% additional tax for an early distribution from a 401K.
To report code 3, go to Other tax situations / Additional Tax Payments / Extra Tax on Early Retirement Withdrawals and follow these steps.
At the screen Identify the Plan click on Qualified retirement plan.
At the screen These Situations May Lower Your Tax Bill, enter the amount of the income subject to the penalty to the right of Permanent Disability.