In this scenario, the two donut-shaped magnets have their south poles facing each other, creating a repulsive magnetic force between them. When the upper magnet is released, it accelerates downward due to gravity, but the repulsive magnetic force between the two magnets opposes this motion. When the upper magnet stops 1 cm above the lower magnet, it indicates that there is a balance between the gravitational force pulling it down and the magnetic force pushing it back up.
As the upper magnet falls, it converts some of its potential gravitational energy into kinetic energy. When it approaches the lower magnet, that energy does not simply disappear; rather, some of it is converted into kinetic energy up until it stops, and some may also be converted into thermal energy due to the interaction of the magnetic fields and any vibrations or friction that may occur in the system.
However, the energy stored in the magnetic field itself is not fully converted into kinetic, thermal, or gravitational energy; rather, it retains a portion of its energy in the form of the static magnetic field between the two magnets, which is responsible for the repulsive force that stops the upper magnet.
Therefore, the most accurate response is:
Some of the energy stored is converted into kinetic, thermal, and gravitational energy.