My mother is 73 years old and does not have any life insurance policy, therefore, she wants to use the 401k to purchase her funeral plan but she feels if she withdraws this money it will have an effect on her medicare status.
However, if your mother is receiving MediCAID services as low income, it may affect her benefits and eligibility. Withdrawal from a 401K is taxable income in most cases, and your mother may end up owing tax on part of her social security income and the 401K withdrawal for the year due to the increase in her income. 401K withdrawals are taxable in most cases because the deposit was made PREtax and reduced taxable income at the time of the deposit. PLEASE Check with an elder lawyer, financial planner or CPA if you are worried about the financial or benefits consequences since we on the board don't have all the info needed to give you a full and complete answer.
I would like to re-iterate the recommendation given above to have someone knowledgeable help her. In addition to possible missed RMD's she might have, depending on the amount of 401k withdrawal, it might make her MAGI (modified adjusted gross income) over the threshold such that her Medicare premiums 2 years hence will be higher. It sounds like this probably will not happen, but you did not (naturally) give any specifics for her case, so it is possible. For example, cleaning out her 401k to simplify the RMD situation might sound like a good idea, but maybe not if it puts her into the next MAGI step. Someone needs to look at the numbers.
Once you reach 70 and a half you are obligated ( PER THE IRS) to withdraw money from your 401k ......Its called an Required Minimum Requirement (RMD)
Basically the IRS/Government allowed you to accumulate funds and interest over your 401K period of time, tax free. Now they want you to pay your share of the income tax you avoided during the life of your 401K After you are 70 and one half you must declare a specific amount % of the total,(based on a predetermined formula to include your age and the amount of accumulated monies). The penalties for failing to do that are severe. When you receive the RMD you add it to your other income for the year and pay tax on the total amount. It is considered income for that year. You can check Google for the formula.I suggest you contact an accountant.
This will not create any eligibility problems for Medicare or Social Security, it will for Medicaid, since the RMD is considered income.
Sarah, Many institutions take care of the RMD for their elderly clients. If mom had a CD at a bank and a savings account, the bank may automatically transfer the distribution from the an CD to the savings or cash account. I do not know the details of your moms 401K, look at the December statement for the account, contact the institution. If she has a savings or checking look for a matching deposit to the IRA withdrawal.
Failure to take the RMD has a big penalty (50% tax on what the withdrawal should have been), if she failed to do this after 70 1/2, and she is 73, make sure you look at the December account statements to get the complete picture and see a tax professional. Please do this prior to December 31 to avoid a penalty for the 2015 tax year. If she has various accounts you need to look at all of them, if it is automated, is happens in December.
Do Not Panic, I had a similar situation found the RMD happened automatically.
Also, some elders eventually stop having to pay taxes, there is no age limit for taxes, but there is a minimum income under which you are not required to file. You are required to pay taxes if your income is over a certain amount ($11,700 for single over 65), BUT Social Security in exempt. Chances are all you need to do is look a the paperwork, consulting a tax professional is a good idea.
Medicare is not affected , unless she categorized as "high income" see this pamphlet. http://www.ssa.gov/pubs/EN-05-10536.pdf Barring that the RMD or other distribution knocks her into the category of high income,withdrawal from the 401K should not affect her medicare.
Just a paperwork trail to chase, do not let it worry you.
If she hasn't been making withdrawals starting at age 70.5, she will owe a penalty to the IRS. Is this a Roth or Traditional IRA? In a Roth, you put after-tax money into the acvount, which is then not taxed at withdrawal. In a traditional IRA, you save pretax money and are then taxed at withdrawal, when yheoretically, you'll be in a lower tax bracket.
Does your mom have an accountant ? Someone needs to be able to explain this to her.
She would have been getting notices from the bank about required min withdrawal. Does mom read her mail and understand it?
Sarah, I guess what we are all saying here is two fold. 1. Find someone knowledgeable and trustworthy who can advise mom and you. 2. Find out why mom didn't understand this in the first place. Is she generally unsophisticated about finances, or is she started to have trouble understanding her finances (and other things that come in the mail).
It would also be a good idea for you to do some reading on the Money and Legal tab on this site. You need to understand the difference between Medicare and Medicaid, for instance, and what they each pay for. Good luck!
Sarah, at 73 your mom is young and really you both could be looking at another 2 decades plus in needing to stretch out her funds. It really important that she & you have an understanding of the costs of aging in the US and what she needs to do to be able to enable you to help her in this optimally as she ages.
If she does not have a will a DPOA, MPOA and perhaps a " guardian in case of incapacity" statement done (not all states allow this one), then make an appt with an elder attorney & try to get one that is NAELA. This site has a drop down list on attys. Good legal is going to have financial advisors, accountants, etc that they work with that understand the extra layers to get things best for an elder client. It's really a different approach than for someone in their 30's.
To have let a couple of years go by on the IRA probably is a sign that she does not understand what it is. Really put on your best Nancy Drew and go through her paperwork to see what her finances & income are and take this with you to the NAELA atty. good luck!
Basically the IRS/Government allowed you to accumulate funds and interest over your 401K period of time, tax free. Now they want you to pay your share of the income tax you avoided during the life of your 401K After you are 70 and one half you must declare a specific amount % of the total,(based on a predetermined formula to include your age and the amount of accumulated monies). The penalties for failing to do that are severe. When you receive the RMD you add it to your other income for the year and pay tax on the total amount. It is considered income for that year. You can check Google for the formula.I suggest you contact an accountant.
This will not create any eligibility problems for Medicare or Social Security, it will for Medicaid, since the RMD is considered income.
Many institutions take care of the RMD for their elderly clients. If mom had a CD at a bank and a savings account, the bank may automatically transfer the distribution from the an CD to the savings or cash account. I do not know the details of your moms 401K, look at the December statement for the account, contact the institution. If she has a savings or checking look for a matching deposit to the IRA withdrawal.
Failure to take the RMD has a big penalty (50% tax on what the withdrawal should have been), if she failed to do this after 70 1/2, and she is 73, make sure you look at the December account statements to get the complete picture and see a tax professional. Please do this prior to December 31 to avoid a penalty for the 2015 tax year. If she has various accounts you need to look at all of them, if it is automated, is happens in December.
Do Not Panic, I had a similar situation found the RMD happened automatically.
Also, some elders eventually stop having to pay taxes, there is no age limit for taxes, but there is a minimum income under which you are not required to file. You are required to pay taxes if your income is over a certain amount ($11,700 for single over 65), BUT Social Security in exempt. Chances are all you need to do is look a the paperwork, consulting a tax professional is a good idea.
Medicare is not affected , unless she categorized as "high income"
see this pamphlet. http://www.ssa.gov/pubs/EN-05-10536.pdf
Barring that the RMD or other distribution knocks her into the category of high income,withdrawal from the 401K should not affect her medicare.
Just a paperwork trail to chase, do not let it worry you.
Best of luck
Does your mom have an accountant ? Someone needs to be able to explain this to her.
She would have been getting notices from the bank about required min withdrawal. Does mom read her mail and understand it?
It would also be a good idea for you to do some reading on the Money and Legal tab on this site. You need to understand the difference between Medicare and Medicaid, for instance, and what they each pay for. Good luck!
If she does not have a will a DPOA, MPOA and perhaps a " guardian in case of incapacity" statement done (not all states allow this one), then make an appt with an elder attorney & try to get one that is NAELA. This site has a drop down list on attys. Good legal is going to have financial advisors, accountants, etc that they work with that understand the extra layers to get things best for an elder client. It's really a different approach than for someone in their 30's.
To have let a couple of years go by on the IRA probably is a sign that she does not understand what it is. Really put on your best Nancy Drew and go through her paperwork to see what her finances & income are and take this with you to the NAELA atty. good luck!
I'm wondering what the best, Medicaid compliant instrument is for an elder to buy for funeral purposes.
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