Question

Jimmer has contributed $15,000 to his Roth IRA and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 24 percent, what amount of tax and penalty, if any, is Jimmer required to pay on the withdrawal in each of the following alternative situations?

a. Jimmer opened the Roth account 44 months before he withdrew the $17,000 and Jimmer is 62 years of age.

Tax$____

Penalty$_____

b. Jimmer opened the Roth account 44 months before he withdrew the $17,000 and Jimmer is age 53.

c. Jimmer opened the Roth account 76 months before he withdrew the $17,000 and Jimmer is age 62.

d. Jimmer opened the Roth account 76 months before he withdrew the $17,000 and Jimmer is age 53.

Answer 1

a. $480 tax and $200 penalty. Because the Roth account has not been open for five years at the time of the distribution), this is a nonqualified distribution. Because Jimmer contributed $15,000, he is allowed to receive $15,000 in distributions from the account without paying tax or penalty. However, because it is a nonqualified distribution, he must pay tax ($2,000 x 24%) and penalty ($2,000 × 10%) on the $2,000 earnings that Jimmer received in the distribution.

b. $480 tax and $200 penalty. Because the Roth account has not been open for five years (and Jimmer has not reached age 59 ½ by the time of the distribution), this is a nonqualified distribution. Because Jimmer contributed $15,000, he is allowed to receive $15,000 in distributions from the account without paying tax or penalty. However, because it is a nonqualified distribution, he must pay tax ($2,000 × 24%) and penalty ($2,000 × 10%) on the $2,000 earnings that Jimmer received in the distribution.

c. $0 tax and $0 penalty. Because this is a qualified distribution (distribution is after Jimmer has attained 59 ½ years of age and the Roth account has been open for more than five years) thedistribution is not subject to tax or penalty.

d. $480 tax and $200 penalty. Because Jimmer has not reached age 59 ½ by the time of the distribution, this is a nonqualified distribution. Because Jimmer contributed $15,000, he is allowed to receive $15,000 in distributions from the account without paying tax or penalty. However, because it is a nonqualified distribution, he must pay tax ($2,000 × 24%) and penalty ($2,000 × 10%) on the $2,000 earnings that Jimmer received in the distribution.