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Author: klouche Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121323  
Subject: Distribution - Disability vs. In Service Date: 1/28/2001 6:35 PM
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Situation:

Person with terminal illness, a public sector teacher, still working, must decide how to configure retirement distribution for benificiaries. If person dies while in service a distribution "X" is awarded to beneficiaries.

If person goes on retirement disability before passing, then beneficiares get either the regular disability payments "P" or a lump sum "Y" which is 3 to 4 times "X". If person just plain retires, then beneficiaries get nothing.

Questions:

What are the tax consequences for the estate and the beneficiary for either "X", "Y" and "P"?

Thanks,
KevinL
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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45009 of 121323
Subject: Re: Distribution - Disability vs. In Service Date: 1/28/2001 8:58 PM
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Person with terminal illness, a public sector teacher, still working, must decide how to configure retirement distribution for benificiaries. If person dies while in service a distribution "X" is awarded to beneficiaries.

If person goes on retirement disability before passing, then beneficiares get either the regular disability payments "P" or a lump sum "Y" which is 3 to 4 times "X". If person just plain retires, then beneficiaries get nothing.

Questions:

What are the tax consequences for the estate and the beneficiary for either "X", "Y" and "P"?


If the total value of the estate, including any lump-sum retirement payment, is more than $675,000 you ought to consult an estate planner. Below that amount, Federal estate tax won't be an issue.

The income tax implications are pretty much the same under all options. You don't tell us whether the teacher made after-tax contributions. If not, all retirement benefits are fully taxable as ordinary income.

If there were contributions, the previously-taxed amount is not taxed again. If the benefits are paid in an annuity, each payment is a combination of previously-taxed contributions and taxable ordinary income. See the discussions in IRS Publication 575.

TMF ExRO
Phil Marti

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