ExpertMedium1 markMultiple Choice
CPA · Question 60 · Area I: Individual Compliance and Planning
A taxpayer has $100,000 in a Traditional IRA (all pre-tax). They convert it to a Roth IRA in Year 1. The value is $100,000. The taxpayer pays the tax from outside funds. What is the impact?
A taxpayer has $100,000 in a Traditional IRA (all pre-tax). They convert it to a Roth IRA in Year 1. The value is $100,000. The taxpayer pays the tax from outside funds. What is the impact?
Answer options:
A.
$0 Taxable Income
B.
$100,000 Ordinary Income
C.
$100,000 Capital Gain
D.
$100,000 Income + 10% Penalty
How to approach this question
Roth Conversion: Taxed as ordinary income. No 10% penalty if converted (penalty applies if withdrawn from Roth within 5 years).
Full Answer
B.$100,000 Ordinary Income✓ Correct
B
IRC §408A. The conversion amount is included in gross income. The 10% penalty does not apply to conversions.
Common mistakes
Applying the 10% penalty.
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