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Retirement
A disability and your 401(k)
June 8, 2001: 8:04 a.m. ET

Early retirement plan withdrawal rules for workers with disabilities
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NEW YORK (CNNfn) - You got injured on the job, and now your worker's compensation is running dry. You're panicking about how you'll pay the bills. You have an IRA and a 401(k), but what are the rules for early withdrawals? And are there any special allowances for people with disabilities?

In response to a reader's question, Doug Flynn, a certified financial planner in New York, said that it is possible to withdraw from an IRA or 401(k) early without penalty.

The key is to take a series of equal payments over five years using IRS life expectancy tables.

Ask the experts a question



Question: My sister has been unable to work for more than two years now because of injuries she suffered at work. She has no income and no insurance except for worker's compensation. She has used up all her savings and has had to start withdrawing money from her IRA in order to live.

How can she avoid paying penalties on her IRA withdrawals? Is there a form or proof of disability from her doctor that she needs to send in with her income taxes? What about a 401(k)? What are the rules for disabilities and early withdrawals?

Answer: In order to avoid penalties on IRA or 401(k) withdrawals when you are not yet 59-1/2 years old, you must meet certain requirements.

First, the general practice is to take a series of equal payments based on the IRS life expectancy table for at least five years, or until age 59-1/2, whichever is longer.

For example, if your sister is 51 she would have to take withdrawals until at least age 59-1/2. However, if she is 56 she would have to continue at the same rate of payment until age 61 to avoid the 10 percent penalty. This is commonly know as Rule 72(t) from the Internal Revenue Code, and you should check with your tax adviser for full details on whether or not this will work for her.

With respect to penalty-free withdrawals due to disability, her 401(k) may allow it if her employer's plan stipulated that disabilities are eligible for hardship withdrawals.

If so, the plan administrator will need to be contacted to confirm this, and she will need to obtain any required 401(k) plan forms. She may not have to be 59-1/2 years old to realize this benefit, however she will probably have to furnish some sort of proof of disability.

When it comes to IRA distributions due to disability: This is a permissible exception to the 10 percent penalty. Box 7 on IRS tax reporting form should be coded as such by the financial institution that holds the IRA so that it is reported properly for tax purposes.

As a result, there isn't necessarily an additional form that has to be filed with her tax return. However, you will need to check with the firm directly to see how they handle such situations. graphic

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.