South Carolina Life Insurance Practice Exam

In the case of direct rollovers between retirement accounts, which of the following is true?

1. Money is distributed to the investor

2. Funds must be reinvested within 60 days

3. Funds are transferred directly between trustees

4. Taxes are withheld automatically

The correct answer is: Funds are transferred directly between trustees

In direct rollovers between retirement accounts, funds are transferred directly from one trustee to another without being distributed to the investor. This method allows individuals to avoid immediate tax consequences and penalties that might otherwise apply if the funds were distributed to them personally. By keeping the money within the tax-advantaged environment of retirement accounts, individuals can continue to grow their savings without interruption. Using a direct rollover ensures that the full amount of the retirement account balance is moved to the receiving account. This significantly minimizes the risk of losing funds to taxes and penalties that could arise from withdrawing money directly. Additionally, since the funds never come into the control of the individual during a direct rollover, there is no requirement to reinvest them within a specific timeframe, as would be the case in situations involving indirect rollovers where individuals receive distributions. This method is beneficial for maintaining the tax-deferred status of retirement savings while enabling account holders to consolidate their retirement assets.