Question

Mrs. Lohan, age 64, plans to retire this December. She estimates that the balance in her IRA will be $86,500, which she plans to withdraw to finance the purchase of a condominium. Assuming that her marginal tax rate is 24 percent, compute her after-tax cash from the IRA liquidation assuming that: a. The IRA is a Roth IRA which she opened in 1999.b. The IRA is a traditional IRA to which she made only deductible contributions.c. The IRA is a traditional IRA to which she made $20,400 deductible and $32,600 nondeductible contributions.

Answer 1

a) $86,500

b) = $65,740

c= $73,564

Step-by-step explanation:

Question 1a) compute her after-tax cash from the IRA liquidation assuming that: a. The IRA is a Roth IRA which she opened in 1999

ROTH IRA represents special retirement account. For this accouont, first you pay taxes on all the cash flows into the account but all withdrawals in the future are tax free

As such, the liquidating distribution based on the Roth IRA is non0-taxable and as such there is no tax liability, therefore, the cash receipt is $86,500

Quest 1b) The IRA is a traditional IRA to which she made only deductible contributions

Based on this scenario, since the contribution is deductible, there will be a 24% tax savings.

Therefore

Cash receipt after tax = Cash receipt - Tax lability

= $86,500 - (Cash receipt x Tax rate)

= $86,500 - ($86,500 x 0.24)

= $86,500 - 20,760

= $65,740

Question 1c) The IRA is a traditional IRA to which she made $20,400 deductible and $32,600 nondeductible contributions.

First, the non-deductible contribution is tax free and as scuh, we will exculde it from the calculation of the tax liability as follows:

Cash Receipt after tax = Cash receipt - Tax liability

= Cash receipt - (Cash receipt - non-deductible contribution) x tax rate)

= $86,500 - ($86,500 - $32,600) x 24%)

= $86,500 - $12,936

=$73,564