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?

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Tyson must pay $12,500 in income tax on the distribution from his traditional IRA, calculated as 25% of the $50,000 distribution. Additionally, because he is under 59 1/2 years old, he will also face a 10% early withdrawal penalty on the distribution, which amounts to $5,000 (10% of $50,000). However, since he is using $37,500 of the distribution to contribute to a Roth IRA, the penalty is only applied to the amount not rolled over, which is $12,500. Therefore, the penalty is $1,250 (10% of $12,500).

Tyson (48 Years Old)owns a Traditional IRA with a Current