In $2020,$ Maxim converted $$6,500$ from his traditional IRA to a Roth IRA. He included the entire $$6,500$ in his income in the year of the conversion. In $2023,$ when the value of the Roth IRA had grown to $$7,000,$ Maxim, then age $60,$ withdrew the entire balance.

What is the tax treatment of this distribution?

None of the distribution is included in income, BUT there is a $10\%$ tax penalty on the entire distribution.

Only the $$500$ in earnings is included in income, but there is NO penalty on the earnings distribution.

Only the $$500$ in earnings is included in income, AND there is a $10\%$ penalty on the earnings distribution.

The distribution is NOT included in income and there is NO penalty.