Final answer:
The IRA is funded with a rollover of money from the 401(k), and a traditional IRA involves tax-deferred growth with taxed withdrawals, as opposed to a Roth IRA with tax-free withdrawals.
Step-by-step explanation:
When a student transfers money from a 401(k) to an IRA, the IRA is funded with a rollover of money. A traditional IRA is an individual retirement account that allows individuals to direct pretax income towards investments that can grow tax-deferred, meaning no capital gains or dividends are taxed until withdrawal. Contributions to such IRAs are capped at specific annual limits, which have been $5,500 ($6,500 for those age 50 or older) for the years 2014 and 2015. Unlike a 401(k), which needs to be set up through an employer, an IRA can be set up individually. The funds in a traditional IRA are taxed upon withdrawal, which contrasts with a Roth IRA, where contributions are made with post-tax dollars and withdrawals are tax-free.