Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $30,000, she received a distribution of the entire $30,000 balance of her traditional IRA. She retained $5,000 of the distribution to help her pay the taxes due from the distribution and she immediately contributed the remaining $25,000 to a Roth IRA. What amount of tax and early distribution penalty is she required to pay on the $30,000 distribution from the traditional IRA if her marginal tax rate is 25 percent?

Question

What will be an ideal response?

Answer 1

$7,500 income tax; $500 early distribution penalty.

Tatia is taxed at 25 percent on the full $30,000 distribution ($30,000 × 25%). She also must pay a 10 percent penalty on the $5,000 distribution she received but did not contribute to the Roth IRA ($5,000 × 10%).