We withdrew in August 2006 my wife's 401k to pay off bills. She has been off work for two years. A Social Security Judge in March 2007 declared her disabled and unable to work. We will be receieving a settlement from Social Security. We were told that since she was disabled there would not be a pre-penalty payment for withdrawing the 401k out eary (she is 52). Is this true? If it is true how do I claim it on my 2006 income taxes?

Was she disabled when you took the withdrawal? If so, then you don't have to pay the 10% penalty. If she became disabled AFTER, you do. You shouldn't need to do anything on your taxes.

You shouldn't need to do anything on your taxes.

Is that entirely correct? Seems to me that while they may not be hit with a 10% early withdrwal penalty due to the hardship, they would still have to pay taxes on any earnings they got in the distribution.

Jwalters - did you receive a 1099 form from the 401(k) administrator? If so, you better be sure to include it.

Is that entirely correct? Seems to me that while they may not be hit with a 10% early withdrwal penalty due to the hardship, they would still have to pay taxes on any earnings they got in the distribution.

Jwalters - did you receive a 1099 form from the 401(k) administrator? if so, you better be sure to include it.

Sorry, I didn't make it clearer. The questions was specifically what to do about the penalty. Yes she needs to report the income. But no she doesn't need to do anything about the penalty.

You don't need to send in a 1099 forms with your taxes.

Unless you had federal income tax withheld from it, then you need to send it in with your tax return.

Agree, but they will have to submit a Form 5329 to explain the exception to the 10% Early Withdrawal Penalty