Disability and 401(k)

You should first confirm with your benefits dept. that there's nothing stooping you from rolling the 401(k) into an IRA. I don't know that they can stop you, it should be no problem. It's important that he rollover paperwork is done properly, you want them to send the money directly to the new IRA custodian, or sent you a check payable to "Broker as custodian for benefit of MrNiceGuy", something like that. So long as you don't take possession, and the employer should not hold 20% for taxes since you are not withdrawing, just transferring. I hope that's clear.

Once in the IRA, you are permitted to make penalty-free withdrawals (still owe taxes) if you are disabled. For this situation, you should max out the 401(k) and tax deductible IRA if you have the budget to do so. (Does your plan limit you to 15%? The MAX this year is $15,500).

Once you are not working, see how much IRA money is needed each year, you may find it's all in your zero bracket, covered by your standard deduction and exemption.

Any questions, come on back. JOE

Joe,

Thank You very much for that information. It is very helpful.

I don't see anything in my plan that would prohibit me from rolling over my 401(k) in the Schwab PCRA to a Schwab IRA Rollover account. I would just have to make it clear that it is in fact a rollover and paid to the broker so no penalties are assessed. To answer your question, my company does have a contribution cap of 15%. I will most likely come close to maxing this year.

My follow up question would be regarding the timing of this. Would it benefit me to move the money now or is it something that would be safe to wait until the time that I come close to stop working? I believe I would have the same fund choices that I have in the PCRA account anyway.

Thanks so much,

MrNiceGuy

As long as you are working for that company, they would not allow an IRA rollover, it's only allowed for people who've left, either disabled, fired, retired. There is an exception if you're 55, which you're not, so that's off topic to this point. I'd suggest maximizing the pre-tax savings (consider the extra $4000 IRA if you can, even if it comes from savings) and managing it (taxwise) after you no longer work. Good luck, JOE

While rare, in-service distributions are not illegal. It depends on the terms of the particular 401(k) plan.

There is an exception on the 10% penalty for taking distributions before you are 59.5, but that is only for people who have left their jobs after age

1. (But once rolled over to an IRA, one must then wait until age 59.5 to withdraw without penalty.)
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   Was this the age 55 exception you had in mind, or is there an age 55 exception for in-service withdrawals?

Mark Freeland snipped-for-privacy@sbcglobal.net

Well, yes, but OP is 35. So, I thought to skip this point, then realized if I didn't mention it, someone would say that I wasn't accurate, so I brought up the 55, but dismissed it since it was tangential to the discussion. The in service distribution you linked to (snipped) referenced a similar issue, a 55-related distribution. Happy to discuss, but this OP is more pressed for time. JOE

The OP expects to be permanently disabled. There is an exception to the 10% penalty for qualified plans (e.g. 401(k) plans) that may apply in this case:

"This tax [10% for early distribution] does not apply to distributions that are: " ... " Made because you are totally and permanently disabled ..."

IRS Publication 575.

It is not necessary to roll over the money to an IRA.

See post in new thread. Thanks.

Mark Freeland snipped-for-privacy@sbcglobal.net

AFAIK, the only age 55 exception with respect to 401(k) withdrawals is that if one separates from service in or after the year one reaches age 55 (e.g. quit in June, turn 55 in October is okay), there is no IRS penalty for withdrawal.

I don't know of any in-service age-related rules except those referring to age 59.5. That is, assuming the plan allows in-service distributions to someone younger than 59.5, the tax treatment of the distribution doesn't depend on the age. In particular, the tax treatment for an in-service withdrawal would be the same for someone over 55 (but under 59.5) as for someone under 55, all else being equal.

If there is any special tax treatment for in-service withdrawals based on an age under 59.5, please educate me (and other readers).

Also, various pages claim that the age 55 exception (for post-separation withdrawals) stated at the top of this post only apply to separation from your last employer. (So, if you quit one employer at age 56, and the next at age 58, you can't take withdrawals penalty-free from the first employer.)

I can't find anything authoritative stating this, and doubt its veracity. Could someone confirm or refute this "only last employer" limitation to the age 55 exception?

Some pages that claim that only last employer counts:

Thanks, Mark Freeland snipped-for-privacy@sbcglobal.net

I didn't think I sugested otherwise. I do know that I can go online and in about 30 seconds and transfer funds from an IRA to a cash account for a client. Taking withdrawals from a 401(k), even if IRS approved, never seems to be simple, and if it's going to be a regular thing, the paperwork can get pretty annoying. I suggest the rolling to an IRA not because it's the only way, just the easiest. I hope I did not appear to suggest otherwise. (Likewise, converting from IRA to Roth is simple within a brokerage account, while I understand that it's permissable within the new tax code to convert from 401(k) to Roth with no IRA stop in between, I'm sure there's still the paperwork involved. I'm big on the November decision as to what withdrawals/conversions to recommend, and I'd like to keep the process simple, lest I be accused of living merely with taxes in mind. The 30 seconds on line just makes it seem less of an issue.) JOE

There is another excemption, if you take out your life expectancy fraction for at least five years starting at ANY AGE.

You can also use an annuitization or amortization method. LE tends to yield the lowest withdrawal amount, but because there are nasty repercussions for messing up a 72(t) SEPP the LE is often the safest withdrawal method.

I must have missed the part about where you have to be 55 or no longer working with the company to rollover. Since I would be rolling it over anyway once I leave due to the disability, I guess it's neither here nor there. Is there a difference between the 401(k) and the IRA as far as what qualifies for the disability exemption?

Thanks,

MrNiceGuy

Sorry for the confusion. You asked about rolling to an IRA while you are still working. YOU (at this age) cannot do that. You will roll it all to an IRA after seperation from the company.

In theory, the withdrawal for a disabled person is permitted for either

401(k) or IRA, but I believe that dealing directly with an IRA custodian who would also handle a non-IRA account for you would make the routine withdrawals much easier.

JOE