Question

George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $28,600. He is planning on transferring (or rolling over) the entire balance into a Roth IRA account. George’s marginal tax rate is 24 percent. (Leave no answer blank. Enter zero if applicable. Round your intermediate calculations and final answers to the nearest whole dollar amount.)

a. What are the tax consequences to George if he takes $28,600 out of the traditional IRA and puts the entire amount into a Roth IRA?

b. What are the tax consequences to George if he takes $28,600 out of the traditional IRA, pays the taxes due from the IRA distribution, and contributes the remaining distribution to the Roth IRA?

c. What are the tax consequences to George if he takes $28,600 out of the traditional IRA, keeps $11,440 to pay taxes and to make a down payment on a new car, and contributes the remaining distribution to the Roth IRA?

Answer 1

a. When you convert from a traditional IRA to a Roth, the amount you convert is added to your gross income for that tax year. It increases your income and you pay your ordinary tax rate on the conversion.

So if George does not move to a different tax bracket. He would still need to pay ordinary tax at Rate of 24% on $28600 i.e. $6864.

b. It’s never a good idea to use your retirement account to cover the tax you owe on the conversion. Doing so would lower George’s retirement balance, which could cost him thousands of dollars in growth over the long-term. George should save up enough cash in a savings account to cover his conversion taxes.He would still need to pay taxes of $ 6864

c. No Change in tax consequences as the withdrawn amount is added to the Income of the year of withdrawal. He would need to pay $6864 in taxes minimum.