Question

A friend is considering an early redemption of an IRA. Should he withdraw funds he would be obligated to pay regular income tax and an IRS early withdrawal penalty. If his marginal tax rate is 22% and the 10% IRS penalty applies determine the amount of federal tax he would owe on a $6,000 withdrawal:

Regular Tax $.................................

Penalty Amount $.................................

Total Amount Due $ ..............................

Answer 1

Solution:

IRA is typically designed for retirment savings. So if any amount is withdrawn form this fund before the age of 59 1/2 then in that case the tax and penalty both would be charged on the withdrawn amount. The tax rate would be the ordinary tax rate i.e. marginal tax rate and the penalty would be 10% which may extended to 25%. In the instant case both the tax and penalty would be charged on the withdrawn amount. The calculation of the dues are as follows:

The marginal tax rate is 22%.

So Regular Tax = $(6000*22%) = $1320

Penalty Amount = $(6000*10%) = $600

Total Amount Due $ = $(1320 + 600) = $1920.