Question

Michelle made an early withdrawal of $6200 from her Roth IRA established 3 years ago ($5600 in principal and $600 in earnings). How much federal income tax would she owe on the early withdrawal if her tax bracket is 22%

Answer 1

Michelle

The federal income tax that she owes on the early withdrawal amounts to $1,364 in addition to a $60 penalty for early withdrawal of earnings.

Step-by-step explanation:

a) Data and Calculations:

Early withdrawal = $6,200

Principal portion = $5,600

Earnings portion = $600

Penalty on earnings for early withdrawal = $60 ($600 * 10%)

Federal income tax on on withdrawal = $1,364 ($6,200 * 22%)

b) Michelle can withdraw Roth IRA contributions (that is the principal portion) at any time with no tax or penalty. When she withdraws earnings from her Roth IRA, she owes income tax and a 10% penalty. This is unlike early withdrawal from a traditional IRA, whether it is the principal contributions or earnings, where there are income taxes and a 10% penalty to be charged the taxpayer on the total amount withdrawn.