Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Your friend is considering taking a distribution from his individual retirement

ID: 2595097 • Letter: Y

Question

Your friend is considering taking a distribution from his individual retirement account (IRA) to purchase a new car. He is uncertain of the tax consequences, so he reached out to you for an explanation. Your friend is 30 years old and has had the IRA for three years. The amounts which he has contributed each year are $3,000 per year. Nw the account has grown to a balance of $15,000 as his investment choices have done very well. He plans to take a distribution for the entire balance. His current tax bracket is 20%. Compute the amount of the distribution (after taxes and penalties) that he would have available for use in purchasing the car under the following assumptions.

a. the account was a traditional IRA.

b. the account was a Roth IRA

Explanation / Answer

a.

If account was a traditional IRA

Tax and 10% penalty is charged on the whole amount i.e.

Amount of distribution = 15000 - (30%*15000)

= 10500

b.

If account was a roth account

Tax and 10% penalty is charge on the excess in amount of contribution

Amount of distribution = 15000 - 30%(6000)

= 13200