Question

In 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

Distributions on earnings from a Roth IRA account is tax free if one is aged atleast 59.5 or older than that and have a Roth IRA account for atleast 5 years which is known as 5 year rule. This 5 year rule also applies to funds converted from a traditional IRA to a Roth IRA.

If the taxpayer is 59.5 and over and do not meet the 5 year rule, distributions count as income, and one has to pay taxes on them but not the 10% early withdrawal penalty.

Dylan withdrew the entire balance at the age 60, i.e. she will not face early withdrawal penalty but she didn't meet 5 year rule as funds were converted on Roth IRA in 2016 and distributions were made in 2019.

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

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