South Carolina Life Insurance Practice Exam

In a direct rollover, how is money transferred from one retirement plan to another?

1. From account to account

2. From trustee to trustee

3. Through a cash withdrawal

4. By the individual investor

The correct answer is: From trustee to trustee

In a direct rollover, money is transferred from one retirement plan to another through a process known as trustee-to-trustee transfer. This means that the funds are moved directly from the financial institution or plan that holds the money (the trustee) to the institution or plan that will receive the money, without the retirement account holder ever taking possession of the funds. This method helps to avoid any tax implications and potential penalties that could arise if the individual were to receive the funds directly before depositing them into another retirement account. Using a direct rollover is advantageous because it ensures the full amount is transferred, maintaining the tax-deferred status of the retirement savings. In contrast, a cash withdrawal would involve the individual receiving the funds, which could lead to immediate tax liabilities and penalties, making it a less favorable option for preserving retirement savings. Additionally, while transferring from account to account or by the individual investor might pose valid methods for transferring funds, they do not align with the formal process defined for direct rollovers in retirement plans.