Question

Arthur, age 32, loses his job in a corporate downsizing. As a result of his termination, he receives a distribution of the balance in his § 401(k) account of $20,000 ($25,000 − $5,000 Federal income tax withholding) on May 1, 2018. Arthur's marginal tax rate is 24%. a. What effect will the distribution have on Arthur’s gross income and tax liability if he invests the $20,000 received in a mutual fund? b. Same as part (a) except that Arthur invests the $20,000 received in a traditional IRA within 60 days of the distribution. c. Same as part (a) except that Dave invests the $20,000 received in a Roth IRA within 60 days of the distribution. d.How could Arthur have received better tax consequences in part (b)?

Please consider the TCJA changes of 2017

Answer 1

a	If he invest $20000 in mutual fund
	This distribution will result in a tax liability of $6000 (25000 x 24%). He was considered as receiving $25000, which will result in
	tax liability of $6000 at the marginal rate of 24%.
b	if he invest in traditional IRA within 60 days of the distribution
	Investment in traditional IRA will be treated as partial roll over of $20000 and tax liability will arise on remaining 5000 at the
	marginal rate of 24%. Thus this will result in tax liability of $1200
c	If he invest in Roth IRA with in 60 days of the distribution
	Investment in Roth IRA is for after tax-money. Thus Authur first have to pay tax on $25000 @ 24% which will amount to $6000,
	and then he can invest that amount in Roth IRA, anf later when he will withdraw from ROTH IRA, he don’t have to pay any tax as this
	investment was from after tax dollar.
d	Investment in traditional IRA is from pre-tax dollar, thus he received better tax consequences in part b.