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Cara, who is 42 years old, had some unexpected medical expenses during the year. To pay for these expenses (which were above the 10% of AGI threshold and claimed as itemized deductions on her tax return), she received a $10,000 distribution from her traditional IRA (she has only made deductible contributions to the IRA). Assuming her marginal ordinary income tax rate is 22%, what amount of taxes and/or early distribution penalties will Cara be required to pay on this distribution

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Answer: $2,200 income tax; $1,000 early distribution penalty

Explanation:

The IRS allows for withdrawals from the IRA before retirement without penalty if the withdrawal is for unreimbursed medical expenses that do not exceed 10% of the person's AGI.

As the expenses exceeded the 10% AGI threshold , She will owe a penalty of 10% on the withdrawal;

= 10,000 * 10%

= $1,000

She will also have to pay her income tax on this.

= 10,000 * 22%

= $2,200

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