Tatia, age 38, has made deductible contributions to her traditional IRA over the past few years. When her account balance was $32,000, she transferred the entire $32,000 out of her traditional IRA and immediately into a Roth IRA. Her current marginal tax rate is 25 percent. What amount of tax and penalty is she required to pay on this rollover?
What will be an ideal response?
$8,000 tax; $0 penalty.
She is taxed on the full amount transferred out of the traditional IRA ($32,000 × 25%) and into a Roth account. She is taxed because contributions to Roth IRAs are not deductible. That is, they are made with after-tax dollars. Because she transferred the entire balance into a Roth IRA within the required time period, she is not required to pay an early distribution penalty.
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