Among the statements given regarding the conversion of a traditional IRA to a Roth IRA, only statement I is correct. It states that the owner is taxed on the converted amount. The other statements contain inaccuracies regarding penalties, eligibility, and the ideal time frame for conversions.
The correct statements regarding the conversion of a traditional IRA to a Roth IRA are: I) The owner is taxed on the converted amount.
This is because with a traditional IRA, contributions are tax-deductible, and the taxes are deferred until withdrawal.
When converting to a Roth IRA, since Roth contributions are made with after-tax dollars, the amount converted is subject to income tax in the year of the conversion.
As for statement II), the 10% premature penalty does not always apply.
The penalty can be avoided if the converted amount remains in the Roth IRA for at least five years or the owner meets certain exceptions such as disability or first home purchase.
Statement III) is incorrect as well; taxpayers who are past their Required Beginning Date (RBD) for taking Required Minimum Distributions (RMDs) can still convert a traditional IRA to a Roth IRA.
Lastly, statement IV) is generally considered false because conversions are not best if funds will be withdrawn in the immediate future as the principal would not have had ample time to grow tax-free which is a major advantage of Roth IRAs.
Question:
Which of the following statements regarding the conversion of a traditional IRA consisting entirely of deductible contributions and earnings to a Roth IRA is(are) CORRECT?
I) The owner is taxed on the converted amount.
II) The 10% premature penalty always applies if the owner is not at least 59½ years old.
III) Taxpayers who are have already reached their required beginning date (RBD) may not convert a traditional IRA to a Roth IRA.
IV) Conversions are best if the funds will be withdrawn in the near future (next 1–3 years).
A) I only
B) II and III
C) I, III, and IV
D) I, II, and IV