I am 56 years old and have become disabled due to severe hearing loss and severe back problems, I am have applied for SSD and I am waitng for a hearing 16-18 months out. I do have a 401K that I would like to access to pay my house off as I am currently not working nor receiving unemployment benifets. Question: Who determines if I am disabled? My doctor told me to apply because I more than qualify, is his documentation suficient for the IRS to waive the 10% penalty or do I have to wait for the SSD ruling... Larry in California

Talk to your 401(k) plan administrator and ask them what documentation they need. Perhaps a letter from your doctor would be sufficient. Whenever you take a distribution they will issue you a 1099-R form and on that form will be a "reason code" that tells the IRS whether you owe the penalty or not, so the key is to convince the plan administrator that you are disabled. If the plan administrator can't certify that you are disabled, they will issue the 1099-R with a code that indicates that you are liable for the 10% penalty - in that case you will have to attach form 5329 to your 1040 for tax year 2010 to show that you do not owe the penalty. This will be due in April 2011, so perhaps your SS hearing will be completed by then.

One other thought - if you left your job in the year you turned 59-1/2 (or later), you can take the withdrawal without penalty. Do you qualify for an exception on that basis? If so, the disability issue is moot.