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?

Question

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The $30,000 of deductible contributions are taxed at Tyson's marginal tax rate of 25%, resulting in $7,500 of income tax. The $20,000 of account earnings are also taxed at 25%, resulting in $5,000 of income tax. Tyson pays a total of $12,500 in income tax. The $1,250 penalty is 10% of the $12,500 taxable distribution.

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