SEPP and Disability?

L1: SEPP and Disability?hi-
i recently went on long-term disabilty (October 2006)and receive regular monthly payments from my company”s insurance company. I do not plan to return to work and need to rollover my 401K plan soon. I was told that I can rollover and take a partial distrbution (to pay some bills) all at once without penalty because of my disability determination. I know I must pay regular income taxes, of course. Is this correct or must I invoke 72 SEPP plan? I turn 55 (in 2007) –when i plan to rollover.
any advice is most appreciated.
thanks!
2006-12-21 11:33, By: Safford, IP: [205.188.116.133]

L2: SEPP and Disability?It is correct as long as you meet the definition of disability – check with your 401(k) Administrator and also with the Trustee/Custodian as to what they consider a disability. Get it in writing and you should be all set – no SEPP required.
2006-12-21 11:41, By: Gfw, IP: [24.148.85.129]

L2: SEPP and Disability?MORE IMPORTANTLY, check the IRS regulations for THEIR definitions of “total disability” as far as the exception to the 10% penalty for early distributions before 55 from 401-k, or before 59 1/2 for IRAs.
FURTHER, you probably SHOULD NOT rollover your 401-k into an IRA. If you do not qualify for the IRS “total disability” exception to the 10% penalty, you will automatically qualify for no 10% penalty for 401-k distributions starting inDecember 2007 because you will be “separated from service”, and the exception applies if you are 55 before 12/31/2007. If you rollover your 401-k to an IRA, this 55 exception does not apply to IRAs.2006-12-22 11:33, By: dlzallestaxes, IP: [4.175.9.186]

L2: SEPP and Disability?Actually, Safford can not avail himself to the “Separation of Service At 55” exception to the 10% surtax as he would have separated from his employer when he was 54 (this year) be virtue of commencing long-term disability.
Safford:
I would advise that you also seek disability payments from Social Security. Then, also take a look at IRC 72(m)(7) which contains the IRC definition of “disabled” along with IRC Reg. 1.72-17A(f). Essentially, the IRC definition of disability is “total & indefinite in duration likely resulting in death”. Further, disability is measured in the contrext of being able or unable to perform one”s pre-disabilty job function.
TheBadger
wjstecker@wispertel.net

2006-12-22 12:09, By: TheBadger, IP: [72.42.67.86]

L2: SEPP and Disability?hi!
actually it is my understanding that i have not officially “terminated service” with my employer. I went on long-term disability through my company”s insurance provider in October 2006 and was told that I go on “inactive” status with my employer for six months (until April 2007). In light of this, can I avoid the 10% penalty and rollover in 2007 without any problems. I would also like to take a small chunk in partial distribution (I must pay income taxes of course on this income, right?) I will be 55 in December 2007. In addition, I have applied for Social Security benefits but that might take quite some time to resolve.
Any other advice? You are all so very helpful. Thanks!
2006-12-22 12:49, By: safford, IP: [24.235.224.206]

L2: SEPP and Disability?THEREFORE –If you satisfy the disability requirements AT ANY AGE, then you would use that exception to the 10% penalty. If you can wait until you are 55 (Dec. 2007), then you would qualify for the 55/Separation from Service exception as well. That appears to give you 2 shots at exceptions before using a SEPP 72-T.
As a result, I would not roll over the 401-k to an IRA unless you determine that neither exceptions apply in your case. You might be able to delay your official “separation from service” until Dec. 2007 in order to qualify for that exception by paying the 10% penalty on distributions before then. (My prior answer was wrong because I confused it with the provision for “catch up” additional retirement plan contributions at any time in the year you will become 50, while the separation from service must be after attaining the age of 55 for a 401-k.)
If you can “fund” the next year in some other way, such as Home Equity Line of Credit, then you can avoid the restrictions of a SEPP 72-T. Then you would avoid the 10% penalty on distributions after 12/2007, and could vary future distributions thereafter based upon need, and not be limited to any fixed annual amount.
SS disabilty should be applied for as early as possible, even though you cannot start to collect until 6 months afterdisability occurs. If approved, you can get SS disability payments, and after collecting for 2 years you automatically qualify for Medicare coverage regardless of your age.2006-12-22 18:20, By: dlzallestaxes, IP: [4.175.9.186]