Question

John established his first Roth IRA six years ago and has made a total participant contribution of $8,000 so far. Two years ago, he also converted his Traditional IRA assets ($6,000) to his Roth IRA (tax deduction was allowed when he contributed to his Traditional IRA and he has paid tax at the time of conversion). John is now 55 years old.

(a). If John withdraws all the money (including contributions, conversions and earnings) from his account to pay for his son’s college tuition now, is it a qualified distribution and why?

(b).The balance in John’s Roth IRA is $18,500. If John withdraws $18,500 to pay for a vacation, what amount is subject to income tax and what amount is subject to early-distribution penalty obligation? Amount subject to income tax $_____ Amount subject to early-distribution penalty obligation $_______

c). The balance in John’s Roth IRA is $18,500. If John withdraws $18,500 from his account to pay for his son’s college tuition, what amount is subject to income tax and what amount is subject to early distribution penalty obligation? Amount subject to income tax $_______ Amount subject to early-distribution penalty obligation $______

MUST SHOW WORK PDF OR EXCEL

Answer 1

1.To count a distribution for qualified,the following two condition must be meet:

a)The account is atleast 5 years old

b)You are atlest 59.5 years old.

Since the age of John is less than 59.5 years,hence his withdrwal is not qualified distribution even ROTH IRA is 5 years or more old.Accordingly,withdrawal of John is not qualified distribution.

2.As per rule,you are allowed to withdraw any contributions that you made to a ROTH IRA tax free and penalty free at any age without the account needing to be five years old.This rule is applicable only to contributions ,the earning that your account generates on those contributions are not included.Accordingly only earnings are liable to tax and early penalty.

Thus,in the given case amount liable to income tax is;

=Total balance-contributions-conversion

=$18,500-($8000+$6000)

=$4,500

Amount liable for early Penalty is equla to the amount laible for income tax,thus amount liable for penalty is also $4,500.

3.In the given case non-qualified distribution are made for qualified higher education expense,hence non qualified distribution does not attract penalty.

Accordingly,amount liable for penalty is Nil and amount liable for income tax is $4,500.