Question

Leo is 34 years old. He contributed $3,000 to a Roth IRA in 2015 and $2,000 in 2016. In 2018, he withdrew the entire balance, which had grown to $5,466. How much of Leo's withdrawal is taxable and subject to penalty?

Answer 1

Answer:

$466 is taxable and subject to penalty

Explanation:

The question is to determine the part of Leo's withdrawal that is taxable and then subject to penalty

Step 1:

What is Leo's contribution in 2015 = $3,000

What is his contribution in 2016 = $2,000

His total contribution = $3,000 + $2,000= $5,000

Step 2: We know that in 2018, Leo withdrew his entire balance which is = $5,466

This means, the excess on his contribution is interest

Leo's interest =$5,466 - $5,000= $466

Step 3:

The interest of $466, therefore, represents the interest on the $5,000 contributed and as such, since he withdrew the whole amount, the interest or the gain of $466 is taxable and the same $466 is subject to penalty