Answer:
a)
Contributions amounting to $320,000 were non deductible.
<u>First year of withdrawal:</u>
Taxfree withdrawal % = Uncovered Investments / Current year value x 100
Taxfree withdrawal % = [$320,000 / ($441,000 + $35,000)] x 100
Taxfree withdrawal % = [$320 / $476,000] x 100
Taxfree withdrawal % = 67.23%
Amount of taxfree withdrawal = 67.23% x $35,000
Amount of taxfree withdrawal = $23,530.5
Taxable amount = Total Withdrawal - Tax free withdrawal
Taxable amount = $35,000 - $23,530.5
Taxable amount = $11,469.5
<u>Second year of withdrawal:</u>
Taxfree withdrawal % = [($320,000 - $23,530.5) / ($407,000 + $60,000)] x 100
Taxfree withdrawal % = [$296, 469.5 / $467,000] x 100
Taxfree withdrawal % = 63.48%
Amount of taxfree withdrawal = 63.48% x $60,000
Amount of taxfree withdrawal = $38,088
Taxable amount = $60,000 - $38,088
Taxable amount = $21,912
b)
$35,000 would be included in taxable income in first year and $60,000 would be included in taxable income in second year.
