Question

Kathleen, age 56, works for MH, Inc., in Dallas, Texas. Kathleen contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf. Kathleen has contributed $42,960 to her Roth 401(k) over the past six years. The current balance in her Roth 401(k) account is $71,600 and the balance in her traditional 401(k) is $54,400. Kathleen needs cash because she is taking a month of vacation to travel the world. Answer the following questions relating to distributions from Kathleen’s retirement accounts assuming her marginal tax rate for ordinary income is 24 percent.

a. If Kathleen receives a $19,000 distribution from her traditional 401(k) account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

b. If Kathleen receives a $19,000 distribution from her Roth 401(k) account, how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

c. If Kathleen retires from MH and then receives a $19,000 distribution from her traditional 401(k), how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

d. If Kathleen retires from MH and then receives a $19,000 distribution from her Roth 401(k), how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

e. Assume the original facts except that Kathleen is 60 years of age, not 56. If Kathleen receives a $19,000 distribution from her Roth 401(k) (without retiring), how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

Answer 1

Part A

As Kathleen is below 591/2, she is eligible for additional 10% penalty on early withdrawal.

Total tax and penalties = (19000*24%)+(19000*10%) = 6460

Amount after paying taxes and penalties = 19000-6460 =$12540

Part B

contribution to Roth 401(k) = $42,960

current balance Roth 401(k) account = $71,600

Thus,

Percentage of nontaxable distribution = 42960/71600 = 60%

Percentage of taxable distribution = 1 – 60% = 40%

Taxable distribution amount = 19000*40% = 7600

Total tax and penalties = (7600*24%)+(7600*10%) = 2584

Amount after paying taxes and penalties = 19000-2584 = $16416

Part C

Total tax and penalties = 19000*24% = 4560

Amount after paying taxes and penalties = 19000-4560 = $14440

Part D

contribution to Roth 401(k) = $42,960

current balance Roth 401(k) account = $71,600

Thus,

Percentage of nontaxable distribution = 42960/71600 = 60%

Percentage of taxable distribution = 1 – 60% = 40%

Taxable distribution amount = 19000*40% = 7600

Total tax and penalties = 7600*24% = 1824

Amount after paying taxes and penalties = 19000-1824 = $17176

Part E

Amount after paying taxes and penalties = $19000 (no taxes as she is of 60 years)