Appreciate your EXCELLENT rating and the bonus.
I just want to summarize our conversation - so it will be clear.
Funds in your 401k account - are YOUR money - and you may decide what to do with these funds as long as you are separated from the employer who set that 401k plan.
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 the 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.
You are correct - if you are disabled - there is no 10% early distribution tax regardless of your age. You are not required to be disabled under SSA - while that might be helpful to proof your disability
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.
The "substantial gainful activity" means - working and receiving a compensation for your work.
Having income from retirement (such as 401k distribution), investment, rental, etc - is not considered as having a "substantial gainful activity"
You may gift any amount to any person - that is not an issue. That gift doesn't affect neither your tax liability not the tax liability of the donee.
Thus - the gift is not included into donee's taxable income and is not deducted on your tax return.
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.
So far - if your gift is less than $14,000 per person per year - there is NO gift tax consequences.
I had to mention that if the donee receives any public assistance based on her income level - for instance Medicaid - she would be required to report any income either taxable or not taxable. Thus legally - she would be required to report your gift even it is not her taxable income and is not reported on her tax return.
So potentially - your gift MIGHT affect her eligibility for public assistance.
Please feel free if you need any clarification of further help with other tax related issues.