Cashed in 401k because wife became disabled,10% penalty
Husband cashed in his 401k. Wish is totally disabled. Can we waive the 5329 10% penalty because the wife being totally disabled, or not because the 401k was just in his name?
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02/01/11 8:37am PST
Viewed by asker 02/02/11 5:59am PST
Viewed by asker 02/02/11 5:59am PST
6 Replies
02/01/11 11:20am PST
The solution
I think this is your answer fro NATP.
This week's question is brought to you by Stephanie Davis, from NATP’s Tax Knowledge Center.
January 27, 2011
Question: Your clients, Brett and Christy had a difficult year, both financially and physically. Brett is a stay-at-home Dad and Christy was recently let go from her job. This past year doctors determined Brett’s failing health qualifies him as disabled. Christy withdrew $20,000 from her retirement plan while she was still employed to help pay for daycare and credit card bills. They are wondering if the early withdrawal penalty will apply since Brett is now considered disabled.
Answer: Unfortunately, Brett and Christy are liable for the 10% penalty on the early withdrawal from Christy’s retirement plan. Under §72(t), the exception to the 10% penalty is only for the plan participant, if disabled, not a spouse.
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02/01/11 12:33pm PST
Does the client/spouse have medical expenses in excess of 7.5% of AGI? You may be able to reduce the penalty if you can't eliminate it.
02/01/11 5:22pm PST
don't you have to be able to document you used the distribution to pay medical bills
02/01/11 5:53pm PST
I don't think you have to trace. It just has to be the same tax year. From 72(t)(2)(B):
Distributions made to the employee (other than distributions described in subparagraph (A), (C), or (D)) to the extent such distributions do not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).
02/02/11 5:59am PST
Latest post
I took the medical over the 7.5%. It was a small amount. Thank you
