Question

n 2016, Dylan converted $5,250 from his traditional IRA to a Roth IRA. In 2019, when the value of the Roth IRA had grown to $5,600, Dylan, then age 60, withdrew the entire balance. What is the tax treatment of this distribution?

None of the distribution is included in income, but there is a 10% tax penalty on the entire distribution.

Only the $350 in earnings is included in income, but there is no penalty on the earnings distribution.

Only the $350 in earnings is in included in income and there is a 10% penalty on the earnings distribution.

The distribution is not included in income and there is no penalty.

Answer 1

Dylan is above 59 and 1/2 years of age. Hence, there is no 10% percent penalty on earnings distributions. So, Option 1 and Option 3 are not possible.

Dylan has not met the minimum 5 year holding condition for her Roth Contributions. So, the distributions are subject to income tax. Dylan would have already paid tax on $5600 upon conversion. So, the tax is levied on net additional amount withdrawn, i.e., $350 (5600-5250).

Hence, the answer is Option 2- Only the $350 in earnings is included in income, but there is no penalty on the earnings distribution.