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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 Conversions are best if the funds will be withdrawn in the near future (next 1–3 years).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

1 Answer

3 votes

Final answer:

the correct answer to the question is option A, I only.

Step-by-step explanation:

When converting a traditional IRA, which is tax-deferred, to a Roth IRA, which offers tax-free growth, there are certain tax implications and rules to be aware of:

  1. The owner is taxed on the converted amount as if it were income for the year of the conversion. This is because the funds in a traditional IRA have not been taxed, whereas Roth IRA contributions are made with after-tax dollars.
  2. The 10% premature penalty does not always apply to conversions, even if the owner is under 59½ years old. The penalty can be avoided if the converted funds are not withdrawn within the five-year holding period starting with the conversion year.
  3. Taxpayers who have reached their required beginning date (RBD) may still convert a traditional IRA to a Roth IRA; there is no age limit or restriction after reaching RBD for conversions.
  4. Conversions are not best if the funds will be withdrawn in the near future. The benefits of a Roth IRA conversion are typically realized when the funds are left to grow tax-free for a longer period, usually more than 5 years, to compensate for the upfront tax hit from the conversion.

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