Question

In: Finance

Marvin, age 32, withdrew $10,000 from his traditional IRA to purchase his first home. Assuming Marvin...

Marvin, age 32, withdrew $10,000 from his traditional IRA to purchase his first home. Assuming Marvin is in the 20% tax bracket, how much does he owe in taxes and penalty?

Solutions

Expert Solution

A traditional IRA, when withdrawn is eligible for taxes and penalties before the age of 59.5 years. Since, Marvin is 32 years old his withdrawal is eligible for taxes and penalties.

Taxes attracted on withdrawal is based on the tax bracket that an individual falls into in that particular year based on the income. Thus, the tax rate for Marvin is 20% as given in the question.

So the tax owed by Marvin is 20% of $10,000 = $2,000.

Penalties are also applicable for early withdrawal from traditional IRA except for certain qualified purposed such as when the person is 59.5 years or older, it is used for first home purchases, permanent disability, if you are unemployed for a long term, certain allowable medical expenses and permitted expenses for higher education,

Since, Marvin's early withdrawal falls in one of the qualified reasons for early withdrawal, he does not owe any penalties for the same.

Hence, Marvin only owes taxes worth $2,000 for early withdrawal of $10,000


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