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Question (Relevant to the Series 6, Series 7, Series 65, and Series 66):
Carlos, age 58, is in the 25 percent marginal income tax bracket. If he takes a $10,000 distribution from his IRA to pay off credit card debt, Carlos will be subject to a total payment of:
Answers:
A. $0
B. $3,250
C. $2,500
D. $3,500
Correct Answer: D. $3,500
Rationale: Carlos will have to pay ordinary income tax of 25% on his distribution, plus a 10% penalty for early withdrawal because he is under age 59 1/2. $10,000 (distribution amount) x 35% (tax + penalty) = $3,500 total payment for both tax-and-penalty. Perhaps Carlos should look at the $1,000 he will be paying in penalty and compare that to the total anticipated interest payments he will be making on his credit card over the next year and a half.
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