401(k) & Social Security Disability

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The Social Security Administration, or SSA, estimates that 30 percent of 20-year-old workers will become disabled and unable to work at some point in their lives; understanding retirement planning and disability insurance may be more important than many workers realizes. The SSA will review your earnings and medical information to ensure you're unable to work before you can receive disability benefits. The administration, however, doesn't impose a resource test to exclude workers with 401k accounts or other retirement savings from qualifying for disability.

Social Security Disability Insurance Eligibility

  • Workers with job experience that contributed to Social Security coffers -- most jobs for which they paid payroll taxes -- who become disabled and are unable to work are typically eligible for disability. Social Security only pays disability benefits to workers whose injury will keep them from working, although in some cases a worker may receive up to $1,000 in alternative-job income and still qualify for disability benefits. Workers must expect to be disabled for at least a year to qualify, and usually don't receive benefits until they've been disabled for five months.

Disability Insurance vs. Wage Replacement

  • The SSA's disability payments are a form of insurance, and aren't a handout to needy workers. Because of this, the administration doesn't measure a disabled beneficiary's savings or investments, and beneficiaries don't need to report distributions from their 401k as income. Distributions aren't new income -- despite being taxed in many cases -- but a withdrawal of savings. If a beneficiary receives Supplemental Security Income , a need-based program, in addition to his disability payment, distributions may impact those payments.

401k and Disability Distributions

  • Although the Internal Revenue Service, or IRS, usually requires investors to keep funds in a 401k until they turn 59 and 6 months or face a steep early-withdrawal penalty, those who become totally disabled may immediately access the funds without a penalty. Because a worker must be totally disabled to qualify to receive Social Security disability payments, those on disability may receive hardship distribution exemptions from the IRS. Employers who administer 401k plans aren't required to allow workers to make hardship distributions based on disability, however, so consult your former human resources department to determine the availability of funds.

Income that Impacts SSD Benefits

  • Like 401k distributions, the amount of SSI benefits or benefits from the Veterans Administration receive doesn't impact the amount the Social Security Administration pays as a disability benefit. Other benefit amounts, such as public disability benefits or workers' compensation disability benefits may reduce the amount of SSD for which a SSD recipient qualifies. Beneficiaries must contact the Social Security Administration whenever the amount of other disability benefits or wages changes so it can potentially modify payment amounts.

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