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Kathleen, age 56, works for MH, Inc., in Dallas, Texas. She contributes to a Roth 401(k) and MH contributes to a traditional 401(k) on her behalf. Over the past six years, Kathleen has contributed $42,960 to her Roth 401(k). 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-long 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 :

a) After taxes and penalties, Kathleen would be able to keep $12,540 of the distribution.

b) Kathleen will be able to keep the full $19,000.

c) After taxes and penalties, Kathleen would be able to keep $12,540 of the distribution.

d) Kathleen will be able to keep the full $19,000.

e) Kathleen will be able to keep the full $19,000.

a. If Kathleen receives a $19,000 distribution from her traditional 401(k) account, she will owe income tax on the distribution. Assuming a marginal tax rate of 24 percent, she would owe $4,560 in taxes. In addition, if Kathleen is under age 59 1/2, she may be subject to a 10 percent early withdrawal penalty, which would be $1,900 in this case. Therefore, after taxes and penalties, Kathleen would be able to keep $12,540 of the distribution.

b. If Kathleen receives a $19,000 distribution from her Roth 401(k) account, she will not owe income tax on the distribution because she has already paid taxes on the contributions. Additionally, since she is over age 59 1/2 and has had the Roth 401(k) account for at least five years, there will be no penalty. Therefore, Kathleen will be able to keep the full $19,000.

c. If Kathleen retires from MH and then receives a $19,000 distribution from her traditional 401(k), she will owe income tax on the distribution. Assuming a marginal tax rate of 24 percent, she would owe $4,560 in taxes. In addition, if Kathleen is under age 59 1/2, she may be subject to a 10 percent early withdrawal penalty, which would be $1,900 in this case. Therefore, after taxes and penalties, Kathleen would be able to keep $12,540 of the distribution.

d. If Kathleen retires from MH and then receives a $19,000 distribution from her Roth 401(k), she will not owe income tax on the distribution because she has already paid taxes on the contributions.

Additionally, since she is over age 59 1/2 and has had the Roth 401(k) account for at least five years, there will be no penalty. Therefore, Kathleen will be able to keep the full $19,000.

e. If Kathleen is 60 years of age and receives a $19,000 distribution from her Roth 401(k) (without retiring), she will not owe income tax on the distribution because she has already paid taxes on the contributions.

Additionally, since she is over age 59 1/2 and has had the Roth 401(k) account for at least five years, there will be no penalty. Therefore, Kathleen will be able to keep the full $19,000.

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