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I searched on line and thought about this. There is no published law to waive the income tax in any way. The person's retirement account, say a 401(k), is ceased to pay certain financial or legal liabilities this person has. The money even if is not used for "enjoyment" but is used for this person's financial liability including whatsoever penalty, etc. The money can be paid from ceased house and/or other assets. The retirement account is one type of assets. The due tax on this asset belonging to this person is still owed by the person. This person can be relieved of certain other types of liabilities or penalties. That is the benefit this person obtained. Think it in another way. If we can choose to pay by the retirement account without tax consequence instead of other assets we have, won't this cease of the retirement account is actually becoming a tax benefit to reward the criminal. That cannot be right.
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Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP