Q. My friend, a co-worker, was diagnosed with cancer about a year ago. She is at the point where she may have to go into hospice. She is looking into applying for disability retirement, but is there another option if an individual may not live long enough to receive all of her retirement pension? Can she withdraw her total retirement and not be penalized for federal taxes? Will her creditors take her life insurance?
A. If she were to resign from the government, she could request a refund of her retirement contributions. Because she already paid taxes on those contributions while she was working, they would be tax-free. However, any interest she received would be taxable. If she were to be approved for disability retirement, any unexpended contributions she made to the retirement fund would be paid to her estate.
Not being an attorney, I can’t tell you what would happen to any monies paid into her estate after her death. What I can tell you is that her creditors could not get their hands on her life insurance before she died.