Question

Homework retirement saving (4-6) 4) Kathleen, age 56, works for MH Incorporated in Dallas, Texas. Kathleen contributes to a Roth 401(k), and MH contributes to a traditional 401(k) on her behalf. Kathleen has contributed $41,520 to her Roth 401(k) over the past six years. The current balance in her Roth 401(k) account is $69,200 and the balance in her traditional 401(k) is $52,800. 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 $18,000 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 $18,000 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 $18,000 distribution from her traditional 401(k), how much will she be able to keep after paying taxes and penalties, if any, on the distribution?

Answer 1

a. Kathleen will be able to keep $11,520 after paying taxes and penalties on the distribution from her traditional 401(k) account. b. Kathleen will be able to keep the full $18,000 from her Roth 401(k) account as she does not owe any taxes or penalties. c. If Kathleen retires from MH and then receives a $18,000 distribution from her traditional 401(k), she will be able to keep $11,520 after paying taxes and penalties.

Step-by-step explanation:

a. To calculate how much Kathleen will keep after paying taxes and penalties on the distribution from her traditional 401(k) account, we need to consider her marginal tax rate for ordinary income. Assuming her marginal tax rate is 24 percent, she will owe taxes of 24% on the distribution. In addition, if Kathleen is under the age of 59.5, she may also be subject to a 10% early withdrawal penalty. So, the total amount she will be able to keep after paying taxes and penalties is:

(1 - 0.24 - 0.1) × $18,000

= $11,520

b. Since Kathleen's Roth 401(k) contributions are made after taxes, she will not owe any taxes or penalties on the distribution from her Roth 401(k) account. So, she will be able to keep the full $18,000.

c. If Kathleen retires from MH and then receives a $18,000 distribution from her traditional 401(k), she will again owe taxes and penalties. The amount she will be able to keep after paying taxes and penalties depends on her overall income in the year of withdrawal. Since she's retired, her income may be lower, resulting in a lower tax rate. Assuming a 24% tax rate and a 10% early withdrawal penalty, Kathleen will be able to keep:

(1 - 0.24 - 0.1) × $18,000

= $11,520