Question

Sherry, who is 52 years of age, opened a Roth IRA three years ago. She has contributed a total of $12,000 to the Roth IRA ($4,000 a year). The current value of the Roth IRA is $16,300. In the current year, Sherry withdraws $14,000 of the account balance to purchase a car. Assuming Sherry’s marginal tax rate is 24 percent, how much of the $14,000 withdrawal will she retain after taxes to fund her car purchase?
Amount of withdrawal

Non-taxable amount

Amount subject to tax$0

Tax rate%

Penalty rate%

TaxPenalty

After tax withdrawal retained

Answer 1

Distribution-IRA The distribution amount is treated as ordinary income and taxed on marginal tax rate. 10% penalty is applied for early distribution except when employee age is 59.5 and above or retired. 10% penalty is exempted for certain distributions such as medical expenses, health insurance higher education expenses and first time home purchase which limits to $10,000. Non-deductible contribution is tax-free until the distribution. At the distribution, the earnings of Non-deductible contribution are taxed.

In this case, it is given that age of S is 52 years who has contributed an amount of $4,000 to Roth IRA plan for past 3 years. Total account balance is $16,300 and the entire amount is deductible. She withdraws $14,000 to purchase a new car.

Her marginal tax is 24%

S receives $14,000 as withdrawal of distribution from the Roth IRA plan for purchasing a car. Amount after considering taxes and penalties is calculated below: Distribution of $14,000 is non-qualified distribution because purchase of a car is not qualified withdrawal. Her age is below 59.5 years and the account is not opened for 5 years. Therefore, earnings of the Non-qualified distribution are taxed with her marginal tax rate. Penalty is charged for the withdrawal because her age is below 59.5 years. The calculation for computing the amount after tax considerations is given below:

Explaniation $4,000 per year Description Contribution Account balance at the end of year 3 Non-qualified Distribution earnings of the distribution Marginal tax rate Income tax on distribution 10% penalty for early distribution Amount $12,000 16,300 14,000 $2,000.00 24% $480 $200.00 Distribution - contribution earnings of distribution marginal tax rate earnings of distribution penalty rate(10%)

Hence, she is taxed for the amount of $2,000 earnings and the tax amount is $480. Penalty for distribution of $2,000 from Roth IRA plan is $200.

Therefore, after-tax consideration, S will have an amount of $13,320 ( $14,000 - $480 - $200) to buy the car.

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