Question

During 2022, Henry, age 47, decided to change jobs. Henry asked his old company to make a direct transfer of his $15,000 balance from his old company's retirement account into his IRA. To avoid paying taxes and penalties on this distribution, Henry must do which of the following?

a) Report the transfer as additional income
b) Invest the entire amount in stocks
c) Rollover the funds directly into the new company's retirement plan
d) Withdraw the funds and pay the penalties

Answer 1

Henry should rollover the funds directly into his IRA to avoid taxes and penalties. This action maintains the tax-deferred status and is not considered taxable income.

Step-by-step explanation:

To avoid paying taxes and penalties on the $15,000 distribution from his old company's retirement account, Henry must rollover the funds directly into his IRA.

This option is not considered taxable income, and as such, Henry will not need to report the transfer as additional income. By conducting a direct transfer, Henry can maintain the tax-advantaged status of his retirement savings without incurring early withdrawal penalties.