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← Series 7: Opens & Maintains Customer Accounts
Series 7 practice questionmediumRetirement Accounts — Rollovers

A client wants to move funds from her employer's 401(k) to a Traditional IRA after leaving her job. To avoid immediate tax consequences and the 20% mandatory withholding, she should:

  1. ATake a lump-sum distribution and deposit it into the IRA within 60 days
  2. BConvert the 401(k) to a Roth IRA to avoid all taxes
  3. CWithdraw the funds and wait 90 days before opening the IRA
  4. DRequest a direct (trustee-to-trustee) rollover from the 401(k) to the IRA✓ Correct answer
Explanation

Why D — Request a direct (trustee-to-trustee) rollover from the 401(k) to the IRA

A direct rollover (trustee-to-trustee transfer) is the most tax-efficient way to move retirement funds between qualified plans. With a direct rollover, the funds are never paid to the participant, so there is no 20% mandatory federal tax withholding and no risk of missing the 60-day deadline. An indirect rollover (where the participant receives the check) triggers the 20% withholding, and the full amount must be deposited within 60 days to avoid taxation.

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