Question

Jimmer has contributed $20,500 to his Roth IRA and the balance in the account is $23,500. In the current year, Jimmer withdrew $21,950 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 24 percent, what amount of tax and penalty, if any, is Jimmer required to pay on the withdrawal in each of the following alternative situations?

Tax:

Penalty:

Answer 1

Tax: $348

Penalty: $145

Because the Roth account has not been opend at the time of distribution, this is a nonqualified distribution as the purchase of new car is not a qualified expense. Because jimmer contributed $20500, he is allowed to receive $20500 in distributions from the account without paying tax or penalty. However, because it is a nonqualified distribution, he must pay tax for $1450 24% i.e ($21950 - $20500) and penalty $1450 10% on the $1450 earnings that jimmer received in the distribution.

Please upvote, Thankyou!