Question

George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $31,800. He is planning on transferring (or rolling over) the entire balance into a Roth IRA account. George’s marginal tax rate is 24 percent. (Leave no answer blank. Enter zero if applicable. Round your intermediate calculations and final answers to the nearest whole dollar amount.)

a. What are the tax consequences to George if he takes $31,800 out of the traditional IRA and puts the entire amount into a Roth IRA?

Tax payable. $______

Penalty $______

Total. $______

b. What are the tax consequences to George if he takes $31,800 out of the traditional IRA, pays the taxes due from the IRA distribution, and contributes the remaining distribution to the Roth IRA? c. What are the tax consequences to George if he takes $31,800 out of the traditional IRA, keeps $12,720 to pay taxes and to make a down payment on a new car, and contributes the remaining distribution to the Roth IRA?

Tax payable. $______

Penalty $______

Total. $______

c. What are the tax consequences to George if he takes $31,800 out of the traditional IRA, keeps $12,720 to pay taxes and to make a down payment on a new car, and contributes the remaining distribution to the Roth IRA?

Tax payable. $______

Penalty $______

Total. $_______

Answer 1

Part A

Tax payable (31800*24%)	$7632
Penalty	$0
Total	$7632

No, 10% penalty tax as he deposited the entire withdrawal of $31800 into a Roth IRA within 60 days of taking it out of the traditional IRA.

Part B

Tax payable (31800*24%)	$7632
Penalty (7632*10%)	$763
Total	$8395

After taxes, amount available for contribution to the Roth IRA = 31800-7632 = $24168

However, George does not rollover the entire withdrawal amount of $31800 to Roth IRA from the traditional IRA. Thus, he is eligible for 10% additional tax penalty on $7632 that he did not contribute or roll over.

Part C

Tax payable (31800*24%)	$7632
Penalty (12720*10%)	$1272
Total	$8904

After taxes, amount available for contribution to the Roth IRA = 31800-7632 = $24168

However, George does not rollover the entire withdrawal amount of $31800 to Roth IRA from the traditional IRA. He contributes only $19080 (31800-12720). Thus, he is eligible for 10% additional tax penalty on $12720 that he did not contribute or roll over.