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 income on his tax return
b) Complete a rollover within 60 days
c) Withdraw the funds and reinvest in a new retirement account
d) Ignore the transfer and proceed with his new job

Answer 1

Henry must ensure the $15,000 from his old company's retirement account is directly transferred into his IRA to avoid taxes and penalties, which does not require him to report the transfer as income or abide by a 60-day rollover period.

Step-by-step explanation:

To avoid taxes and penalties on his distribution, Henry does not need to report the transfer as income because a direct transfer of his retirement account balance into his IRA is a non-taxable event. In a direct transfer, also known as a trustee-to-trustee transfer, the funds are sent directly from one retirement plan to another without the accountholder having control or custody of the funds. This method of moving money between retirement accounts avoids withholding taxes and potential penalties that could apply if Henry took possession of the funds.

Therefore, Henry must ensure that he completes the direct transfer and does not withdraw the funds himself. If the funds are distributed to Henry instead of being directly transferred to the new retirement account, he would typically have 60 days to complete a rollover to another qualifying retirement account without being taxed or penalized. This is different than a direct transfer, which does not have this 60-day requirement.