Many people take early withdrawals from their retirement plans while waiting for their disability applications to be approved. If you are taking an early withdrawal from your pension, 401k or retirement plan, there are two kinds of penalties you may need to worry about:
- Penalties from your retirement plan.
- Tax penalties
They can be dealt with different ways.
Avoiding Pension Plan Penalties
Many pension and retirement plans have a policy for hardship withdrawals. If you qualify, you can withdraw funds without penalty. Read your policy and contact your retirement plan provider to find out more about their criteria for a hardship withdrawal.
Avoiding Tax Penalties
To avoid tax penalties, there are a few types of tax exceptions you may wish to look into:
🌷Exception for people who are totally and permanently disabled. You do not need to be on disability, but you do need a doctors statement that you are totally and permanently disabled. Learn more about The Disability Exception
🌷 Exception for people with high medical expenses. If you had high medical expenses during the year you made the withdrawal, you may be eligible for a tax exception. Learn more about Medical Hardship Exceptions
Tip: Many many things can count as medical expenses! In certain situations costs of vitamins, supplements, meals, transportation, service animals, and many other things you might not expect. Learn more in this IRS booklet on Medical expenses.
If you are still employed, you may be able to take out a loan from your retirement plan, instead of an early withdrawal. In some situations, loans may not be taxed and also will not count as income for most benefits and assistance programs.
There are a few additional types of hardship withdrawals, including exceptions for college expenses and for first-time homeowners. You can also see if there are any other type of exceptions you qualify for on the IRS List of Early Withdrawal Exceptions
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🌸 Page Updated: 10/1/19
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6 thoughts on “How to Avoid Penalties from Retirement Plan Early Withdrawals”
thanks so much for everyone who works on this web page. I’m looking into a discharge of my student loans, which I wouldn’t have known about otherwise. Thank you!
This website is the best resource I’ve found for disabled and chronically ill persons for how to get on anything!
I had to do this while waiting on my disability hearing. It was good to know I had something to fall back on (a safety net) but, by the time my case came up all had been withdrawn so I could survive.And I mean live on no frills. Cable T V was the first to go. Since I was limited on mobility (physically) I chose land line over my cell phone. Did not have to worry about a battery going dead. At times you will be spend a lot of time on the phone. All taxes and penalties were paid upfront. Part of it was return after I could prove my disability (penalties) Have a good tax person for this so things go smoother with the I R S. With your 401 k you can take out what is called a hardship loan . I needed to do this back in 2000 when I was laid off you only pay the taxes no penalties another safety net. And I believe you pay a lower tax in both cases. Best to get to know how your 401 k’s work while your still working at the place you work there not a one size fits all. In some cases a hardship loan (taxes only) is one time only until you can prove other wise. Meaning you will be paying taxes and penalties. One more thing if you can remove what debt you can and still feel financially secure. I hope this is helpful.
Great post. Thank you for sharing this.
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