Question

Hal, age 75, withdrew $100,000 from his IRA that was invested with his stockbroker this year. What are the tax implications?

a.) The adjusted basis in the IRA will be taxed as long-term capital gain; the gain will be taxed as ordinary income.
b.) All $100,000 will be taxed as ordinary income.
c.) The adjusted basis in the IRA will be taxed as ordinary income, the gain will be taxed as a long-term capital gain.
d.) All $100,000 will be taxed as ordinary income and there will be a 10% early withdrawal penalty.

Answer 1

Hal's $100,000 withdrawal from his IRA will be taxed as ordinary income. Being over 75 years old, he is not subject to the 10% early withdrawal penalty. The entire distribution is taxable regardless of the IRA’s investment performance.

Step-by-step explanation:

When Hal, age 75, withdrew $100,000 from his IRA, the tax implications of such a transaction are as follows: All $100,000 will be taxed as ordinary income. This is because withdrawals from a traditional IRA, which Hal's account presumably is given that the question does not mention it being a Roth IRA, are taxed at the individual's current income tax rate at the time of withdrawal.

Investments within a traditional IRA grow tax-deferred; thus, there are no capital gains considerations when taking the distribution, meaning it does not matter how much the account has grown in value or what the contributions were—everything taken out is taxed as income.

Since Hal is over 59 and a half, he does not have to pay the 10% early withdrawal penalty, which only applies to those younger than 59 and a half withdrawing funds from their IRA. Therefore, option 'b' is the correct answer to the question of tax implications for Hal's IRA withdrawal.