Hi and welcome to our site!Sorry for your situation.First of all - funds in your 401k account - are YOUR money - and you may decide what to do with these funds.You are correct - if you are disabled - there is no 10% early distribution tax regardless of your age.
However - you still need to consider your income tax liability. When funds were contributed into your 401k - generally they were not included into your taxable income - means your tax liability were deferred. However - when you take distribution - the distributed amount is added to your taxable income.So - you may want to plan your distribution wisely and avoid large distribution in any single year - by doing that - you will avoid large taxable income and higher tax brackets.
I WANT TO GIVE A PORTION FOR A FRIEND AND HER SON. SHE WAS RECENTLY DIVORCED DUE TO ABUSE. WOULD THAT BE A PROBLEM?
Under IRS rules - a person is permanently and totally disabled if both 1 and 2 below apply.
1. He or she cannot engage in any substantial gainful activity because of a physical or mental condition.2. A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.
After distribution - you may use funds as you wish - these are YOUR money - there is no issues and no problem - and will not affect your income tax liability.That will considered as gift to your friend.
IS HELPING A PERSON IN NEED A HELPFUL GAIN? WOULD THIS BE CLASSIFIED AS A SUBSTANTIAL GAIN? AS TO PHYSICIAN, I HAVE HAD MS AND HAVE DEGRADED OVER THE LAST 7 YEARS.
Gift itself - is not taxable income in the US. Please see for reference IRS publication 525 page 31 left column - - http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you.So your friend will not need to claim that gift on her tax return. There is no any amount limit. That is for income tax purposes. That would be the donor who files form 709 - gift tax return - not recipients of the gift. The gift tax return is required when the total value of the gift is above $14,000 (for 2013) per person per year.There will not be any gift taxes unless the lifetime limit of $5,250,000 (adjusted every year for inflation) is reached.
The "substantial gainful activity" means - working and receiving a compensation for your work. Having retirement income from 401k is not considered as having a "substantial gainful activity"
BY ME GIVING THE AID TO A FRIEND/ " GIFT" , BY ME FILING FORM 709, WHAT WOULD I BE TAXED ON MY 1040? SHE AND HER SON ON ON MEDICAID. SHE WILL HAVE TO FILE I ASSUME BECAUSE AS SOON AS SHE IS STABLE AND SET, SHE ONLY RECEIVES 1200.00 PER MO FOR CHILD SUPPORT.
By giving a gift - you will NOT be taxed on form 1040. That is not your income and there is NO income taxes because of gifting.However - if you gift will be above $14,000 per person per year - you will need to file form 709 - that is a GIFT tax return. There will not be any gift taxes unless the lifetime limit of $5,250,000 is reached.
I WISH TO THANK YOU FOR ALL YOUR HELP IN THIS MATTER.
You are welcome.
Good morning Mr Lev. Thank you for your help but I wish to have you clarify another tax issue. If I give my friend the $100,000 as a loan, what will be my tax implications this year and what affects will be on her Medicaid?
She is on Medicaid and does she have to state the loan? I do not want this to affect her Medicaid which he has had since her divorce. What ramifications are there if she does not inform Medicaid? What amount will I have to pay in taxes? She stated that she would pay me back within 2 years. .
She has been receiving Medicaid since her divorce and she receives only child support for her son. She is trying to get on her feet and she has no family except me her friend.. If I loan her an amount, will her Medicaid coverage be affected? She receives no payments fro Medicaid.
I may not say for sure if her coverage will be affected - but it MIGHT be affected, because the money in her account will be treated as her asset and must be reported.
That will not be her income - because she is obligated to pay the loan back - but as soon as funds are deposited into her account - that will be her asset.
Additional complications comes because each state has its own eligibility rules and while they are similar between states - there are some small differences.
For exact affect on her eligibility - I might suggest to contact her social worker and ask to evaluate possible situation.
I AM ONLY LOANING $90,000 AND IT WILL BE RETURNED IN FEB. I WILL PUT IT BACK INTO FIDELITY ACCOUNT THEN. ONCE I RECEIVE IT, WILL BE SENT TO FRIEND. DO I STILL HAVE TO MAKE IT A LOAN? YOU HAVE BEEN FANASTIC AND I WISH TO THANK YOU.
I AM ONLY LOAN $90,000 AND IT WILL BE RETURNED IN FEB. I WILL PUT IT BACK INTO FIDELITY ACCOUNT.. . DO I STILL HAVE TO MAKE IT A LOAN? YOU HAVE BEEN FANASTIC AND I WISH TO THANK YOU
Mr Lev, can you tell me how to write-up a loan form and state what should be stated?
YOUR PATIENCE AND PROFESSIONALISM ARE SECOND TO NONE. THANK YOU. SHOULD THE NOTE BE NOTARIZED?
I DID NOT HAVE TO PAY PENALTY DUETO PERMANENT DISSABILITY HOWEVER TO TAKE OUT FROM 401K, FIDELITY HAS TO WITHHOLD 20% WHICH WILL PAY THE FED TAXES. INSTEAD OF 120K, I WILL BE GETTING 96K AND ONCE I RECIEVE FUNDS BACK, I WILL OPEN A NON RETIREMENT FUND ELSEWHERE.
Mr Lev, you are extremely helpful. I had 120k and they kept 20% to pay FEDERAL tax. What will the state be? I take home 2,141.00 after taxes and there is no other income. Each year I donate to salvation army and it totals avg $1,500 for donations. Can you estimate what I will pay for the state? Thank you. Will I have to pay anymore FED taxes? Already took out the 20%. Fidelity representative state that FED doesn't care about your reason. They will pay the tax for me. Is that correct? You cannot put it back because Lehman Brothers doesn't exist. When I get it back, I will happen to open a new investment instrument.
As we already discussed 20% is NOT your actual tax liability related to that distribution - that is a federal income tax withholding to cover possible tax liability - which may be more or less than 20% depending on your situation - and will be calculated when you prepare your tax return.
So if your actual tax liability will be more than 20% - you will have to pay a difference. But if your actual tax liability will be less than 20% - you will be getting a refund.
New York's state income tax rates are between 4% and 8.82%. In your income level - most likely you will pay somewhere between 6.45% and 6.85% - so for raw estimations - we may use 6.5%.
New York City has its own taxes - so if you are in NYC - there will be additional ~3.6% - see rates here - http://www.tax.ny.gov/pdf/current_forms/it/nyc_tax_rate_schedule.pdf
Let me know if you need any help.