Greenlight Exam 2 Practice

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Which of the following is true regarding transfers from a 401(k) to an IRA?

Transfers are taxed as ordinary income

Transfers count towards the annual contribution limit

There is no penalty if done correctly

The correct answer highlights that there is no penalty for transferring funds from a 401(k) to an IRA, provided the transfer is executed correctly. This means adhering to the rules of the rollover process, which typically involves directly transferring the funds from the 401(k) plan to the IRA without the individual taking possession of the money.

When this process is done correctly, it is classified as a "direct rollover," which allows for the deferment of taxes until withdrawals are made from the IRA. Mistakes in the transfer process can result in unintended tax consequences, including potential penalties, which is why following the protocol is essential.

The other options do not accurately represent the nature of 401(k) to IRA transfers: they either mischaracterize the tax implications or suggest restrictions that don't apply to this specific type of transaction.

Transfer amounts are capped