Question

Required information Problem 13-56 (LO 13-2) Kathleen, age 56, works for MH, Inc., in Dallas, Texas. Kathleen contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf. Kathleen has contributed $42.240 to her Roth 401(k) over the past six years. The current balance in her Roth 401(k) account is $70,400 and the balance in her traditional 401(k) is $53,600. Kathleen needs cash because she is taking a month of vacation to travel the world. Answer the following questions relating to distributions from Kathleen's retirement accounts assuming her marginal tax rate for ordinary income is 24 percent. Problem 13-56 Part a a. If Kathleen receives a $18,500 distribution from her traditional 401(k) account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution? Net distribution

Answer 1

a. If Kathleen withdraws $18,500 from traditional 401k.

In such case she will have to pay tax @ 24% + additional tax @ 10% as levied by IRS.

Total tax to be paid = (18,500 * 24%) + (18,500 * 10%)

= $6,290

Net distribution =   $18,500 - $6,290 = $12,210

b. If Kathleen withdraws $18,500 from ROTH 401k.

Amount not taxable = (Contribution in Roth 401k / Account Balance in Roth 401k) * Withdrawal

= ($42,240 / $70,400) * $18,500

= $11,100

Taxable Amount = $18,500 - $11,100 = $7,400

Total tax to be paid = (7,400 * 24%) + (7,400 * 10%)

= $2,516

Net Distribution = $18,500 - $2,516 = $15,984

c. If Kathleen retires can she withdraw $18,500 from traditional 401k

Tax to be paid = Amount to be withdrawn * Tax Rate

= $18,500 * 24%

= $4,440

Net Distribution = $18,500 - $4,440 = $14,060

d. If Kathleen retires can she withdraw $18,500 from Roth 401k   

Amount not taxable = (Contribution in Roth 401k / Account Balance in Roth 401k) * Withdrawal

= ($42,240 / $70,400) * $18,500

= $11,100

Taxable Amount = $18,500 - $11,100 = $7,400

Tax to be paid = (7,400 * 24%)

= $1,776

Net Distribution = $18,500 - $1,776= $16,724

e. If Kathleen retires and she is 60 years old can she withdraw $18,500 from Roth 401k   

As per IRS, to make a qualified withdrawal from a Roth 401(k) account, retirement savers must have been contributing to the account for at least the previous five years and be at least 59½ years old.

Accordingly Kathleen will not be charged any tax.

Net Distribution = $18,500