Jessica is 49 years of age. She has been saving for retirement for many years an

Question

Jessica is 49 years of age. She has been saving for retirement for many years and has fairly large balance in her IRA. Amanda, Jessica’s daughter who is in her senior year of high school, has been notified that she has been accepted to Rice University. Jessica had expected Amanda to go to a state university and was not prepared for the tuition costs associated with Rice. After some thought, she has decided that the only thing she can do is to take approximately $ 20,000 per year from her retirement plan.

Question: What are the tax consequences to Jessica for the withdrawals from her IRA?

To answer this question, use the Internal Revenue Code. You may refer to a textbook but you may not base the answer on the textbook – you must reference the IRC section. What keywords did you use in your search to derive this answer?  

Explanation / Answer

Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called ”early” or ”premature” distributions. Individuals must pay Income tax and additional 10% early withdrawal tax unless an exception applies.

Since Jessica is of age 49 and less than prescribed age 59½ hence withdrawl by Jessica is covered under ”early” or ”premature” distributions and subjected to Income tax and additional tax at 10% unless withdrawl by Jessica is covered under exceptions.

One of the exception for levying additional penalty of 10% is Paying for qualified higher education expenses i.e., college expenses for yourself or a dependent (only qualified expenses are eligible) under section 72(t)(2)(E) of IRC.

Since withdrawl is for Jessica’s daughter being covered under dependent who is in her senior year of high school, to pursue tuition in state university same is covered under exception for levying additional tax at 10% and hence not subjected to additional tax.

Key words used Taxability on account of withdrawl, Exemptions from Taxability, Early or Premeture withdrawl.

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