Rhode Island Life Insurance Practice Exam

A 55-year-old recently received a $30,000 distribution from a previous employer's 401k plan, minus $6,000 withholding. Which federal taxes apply if none of the funds were rolled over?

1. Only income taxes

2. Income taxes plus a 10% penalty tax on $30,000

3. Income taxes and state taxes only

4. Income taxes and local taxes only

The correct answer is: Income taxes plus a 10% penalty tax on $30,000

The correct choice highlights that the individual will owe federal income taxes on the entire distribution from the 401(k) plan, as any withdrawals from a traditional retirement account are generally subject to federal income tax. Additionally, because the individual is 55 years old, there is an exception to the early withdrawal penalty commonly applied to distributions taken before age 59½ in certain situations; however, unless those exceptions apply, the penalty does apply here. Thus, the 10% penalty tax on the taxable amount, which in this case is the entire distribution of $30,000, would be relevant as well. Due to the nature of the distribution, since it was not rolled over, the regular income tax applies to the entire amount withdrawn, and the additional 10% penalty tax applies unless a specific exception is applicable—this is based on IRS rules related to early distributions from retirement accounts. Therefore, the individual in this scenario would be responsible for both the income tax on the total distribution and the additional penalty tax, leading to the understanding that both taxes are included in this situation. The other options do not encompass the need to include both the income tax and the potential penalty tax applicable to early withdrawals from a 401(k) when not rolled over, which