Huxley (60) and Elise (45) started the process on adopting Elwood (15) on May 1, 2020....

Huxley (60) and Elise (45) started the process on adopting Elwood (15) on May 1, 2020. On July 6, 2020, Huxley took a $5,000 distribution from his 401(k). On September 24, 2020, Elise took a $5,000 distribution from her IRA. What is the tax treatment of each distribution?

Huxley's distribution is taxable and not subject to the early distribution penalty. Elise's distribution is taxable and subject to the early distribution penalty.

Huxley's distribution is not taxable or subject to the early distribution penalty. Elise's distribution is taxable and subject to the early distribution penalty.

Huxley's distribution is taxable and not subject to the early distribution penalty. Elise's distribution is taxable and not subject to the early distribution penalty.

Huxley's distribution is taxable and subject to the early distribution penalty. Elise's distribution is taxable and not subject to the early distribution penalty.

Expert Solution

Based on the information available in the question, we can answer as follows:-

The correct answer is Option A. Huxley's distribution is taxable and not subject to early distribution penalty. Elise's distribution is taxable and subject to early distribution penalty. Per IRS, when there is a withdrawal from an IRA account after the age of 59.5 but before 70.5 years , the distribution is not subject to early distribution penalty. However the income would be included as part of the Gross income of the tax payer. Hence, Huxley's withdrawal is subject to tax and since Elise distribution is done when was just 45, it is subject to both tax on income and early distribution penalty.

Option B is incorrect as Huxley's distribution is still taxable as it is made after the age of 59.5 years but before 70.5 years.

Option C is incorrect. Elise distribution is subject to early distribution penalty as it is withdrawn before Elise attains the age of 59.5 years. Only distributions after 59.5 years are not subject to early distribution penalty. This option is not valid.

Option D is incorrect as Huxley's distribution is not subject to early distribution penalty and Elise's distribution is subject to early distribution penalty. This options is hence icorrect.

Please let me know if you have any questions via comments and all the best :) !

ekkarill92 answered 4 months ago

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