Question

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25 percent. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?

Answer 1

$12,500 income tax; $1,250 penalty

Step-by-step explanation:

The distribution from the traditional IRA is fully taxable since he Tyson receives a distribution of the entire $50,000 balance of his traditional IRA

($50,000 x 25%) = $12,500.

Therefore Tyson must pay a 10% penalty on the portion of the distribution that he did not contribute to a Roth IRA despite Tyson receives a distribution of the entire $50,000 balance of his traditional IRA in which he retains $12,500 to pay tax on the distribution

($12,500 x 10%) =$1,250

Therefore $12,500 will be his income tax amount and $1,250 will be his penalty amount