Question

Ryan is 39 years old and works as a real estate agent. Ryan’s marginal tax rate is 24%. Ryan has a traditional (deductible) IRA with a current balance of $80,000. The IRA consists of $60,000 of contributions that Ryan made and deducted on his tax return and $20,000 of account earnings. In the current year, Ryan receives a distribution of the entire $80,000. He contributes $60,000 to a Roth IRA and keeps the remaining $20,000. What is Ryan’s total income tax and penalty on the transactions?

$0 income tax, $0 penalty

$20,000 income tax, $8,000 penalty

$5,000 income tax, $2,000 penalty

$20,000 income tax, $2,000 penalty

Answer 1

The answer would be 20000 income tax and 2000 penalty.

Rollover from traditional (deductible) IRA to Roth IRA attracts no penalty, however, in traditional IRA any pre-tax contributions and all earnings are taxed at the time of  withdrawal.

if the IRA funds comes and one put them back into a qualified account within 60 days, one is spared the taxes and penalties.

However since the rollover is to Roth IRA, Roth IRA contributions are non tax deductible. Thus Tax would be due on $ 80,000 and penalty of 10% needs to be paid for $20,000.

Thus the answer is $ 20,000 Income tax and $ 2000 Penalty