How could Samuel have received better tax consequences?
Chapter2: Income Tax Concepts
Section: Chapter Questions
Problem 35P
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Samuel, age 32, loses his job in a corporate downsizing. As a result of his termination, he received a distribution of the balance in his § 401(k) account of $20,000 ($25,000 − $5,000 Federal income tax withholding) on May 1, 2020. Samuel’s marginal tax rate is 24%.
- What effect will the distribution have on Samuel’s gross income and tax liability if he invests the $20,000 received in a mutual fund?
- Gross income: $25,000
- Tax liability: $6,000
- Same as part (a) except that Samuel invests the $20,000 received in a traditional IRA within 60 days of the distribution.
- Gross income= $5,000 (amount not invested)
- Tax liability= $1,200
- Same as part (a) except that Samuel invests the $20,000 received in a Roth IRA within 60 days of the distribution.
- Gross Income= $25,000
- Tax Liability= $6,000
- How could Samuel have received better tax consequences?
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