[needhelpnow]

Joan, age 40, withdrew $15,000 from her traditional individual retirement account last year, using the proceeds to pay off an outstanding hospital bill ($12,000) and the balance of her auto loan ($3,000). Her adjusted gross income was $100,000 and her other deductible medical expenses totaled $2,500. Compute the early withdrawal penalty, if any, that Joan will have to pay.

ANSWER: $1050

The early withdrawal penalty is 10% of the amount of the withdrawal, but it does not apply to amounts paid for medical expenses in excess of 10% of AGI. Joan’s medical expenses totaled $14,500 and 10% of her AGI is $10,000, so the penalty does not apply to $4,500 of her withdrawal. Therefore the penalty is assessed at 10% of the other $10,500, or $1,050.

This doesn’t make sense to me. Where did the other 10,500 come from? Can someone help me understand? Thank you

[Jsmith87]

$15,000 withdraw – $4,500 = $10,500

I'm not familiar with this question or calculation, but your explanation seems clear to me. Normally there is a 10% penalty for early withdraw. But the penalty is not assessed on certain medical expenses above 10% of AGI. So the 15,000 minus the $4500 is 10,500.

[Jsmith87]

$15,000 withdraw – $4,500 = $10,500

I'm not familiar with this question or calculation, but your explanation seems clear to me. Normally there is a 10% penalty for early withdraw. But the penalty is not assessed on certain medical expenses above 10% of AGI. So the 15,000 minus the $4500 is 10,500.

[JamesBJames]

$7,500 of the medical expenses (the portion under 10% of AGI when combined with her other medical expenses) and the full $3,000 of the personal loan are subject to the 10% penalty for early withdrawal.

The $4,500 (the portion above 10% of AGI when combined with her other medical expenses) is not subject to the 10% penalty.

So the penalty is ($7,500 + $3,000) * 10% = $1,050.

FAR: May 1st, 2014 - 91
AUD: May 29th, 2014 - 97!
BEC: July 16th, 2014 - 91
REG: August 29th, 2014 - 88

Licensed December 2015

Feel free to add me on LinkedIn by clicking my username!

[JamesBJames]

$7,500 of the medical expenses (the portion under 10% of AGI when combined with her other medical expenses) and the full $3,000 of the personal loan are subject to the 10% penalty for early withdrawal.

The $4,500 (the portion above 10% of AGI when combined with her other medical expenses) is not subject to the 10% penalty.

So the penalty is ($7,500 + $3,000) * 10% = $1,050.

FAR: May 1st, 2014 - 91
AUD: May 29th, 2014 - 97!
BEC: July 16th, 2014 - 91
REG: August 29th, 2014 - 88

Licensed December 2015

Feel free to add me on LinkedIn by clicking my username!

[Jsmith87]

What calculation did you do to get $7,500?

12000 – 4500

[Jsmith87]

What calculation did you do to get $7,500?

12000 – 4500

[Mika]

I have a different interpretation.

Total Medical expenses = $12,000+$2,500 = $14,500

Auto loan of $3,000 is non-deductible so need to applied EWP

Medical expenses subject to 10% AGI = 10,000

Withdrew amount from IRA = $15,000

Early withdrawl penalty rate = 10%

Penalty applied:

(15,000 – 4,500*) x 10% = $1,050

*$4500 = $14,500 – $10,000

REG - 80 (02/13/2015) Roger + Ninja Flash Card + Ninja MCQ + Becker's Note
FAR - 84 (05/29/2015) Roger + Ninja MCQ + Some Wiley book questions
BEC - 77 (08/27/2015) Roger + Ninja MCQ + Half Wiley book questions
AUD - 87 (08/28/2015) Roger + Ninja MCQ + Half Wiley book questions

[Mika]

I have a different interpretation.

Total Medical expenses = $12,000+$2,500 = $14,500

Auto loan of $3,000 is non-deductible so need to applied EWP

Medical expenses subject to 10% AGI = 10,000

Withdrew amount from IRA = $15,000

Early withdrawl penalty rate = 10%

Penalty applied:

(15,000 – 4,500*) x 10% = $1,050

*$4500 = $14,500 – $10,000

REG - 80 (02/13/2015) Roger + Ninja Flash Card + Ninja MCQ + Becker's Note
FAR - 84 (05/29/2015) Roger + Ninja MCQ + Some Wiley book questions
BEC - 77 (08/27/2015) Roger + Ninja MCQ + Half Wiley book questions
AUD - 87 (08/28/2015) Roger + Ninja MCQ + Half Wiley book questions

[Author]

Replies