Final answer:
The conversion of a traditional IRA to a Roth IRA is taxable. The taxpayer must report the conversion amount as income, resulting in a tax liability for that year. Future distributions from the Roth IRA, however, will be tax-free.
Step-by-step explanation:
When a taxpayer converts a deductible traditional IRA to a Roth IRA in a rollover, the tax implications are that the conversion amount is treated as taxable income. Since contributions to a traditional IRA are typically made with pre-tax dollars and grow tax-deferred, the government requires taxes to be paid on the money at the time of the conversion to a Roth IRA, whose contributions are made with after-tax dollars. After the conversion to a Roth IRA, the funds then grow tax-free, and qualified withdrawals are also tax-free.
Therefore, the correct answer to the student's question is c) Taxable. When the conversion occurs, the taxpayer must include the amount converted as income for tax purposes. However, future benefits include tax-free growth and tax-free withdrawals, provided the requirements for a qualified distribution are met.