FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsEasy
A client decides to transfer their existing Individual Retirement Account (IRA) from one brokerage firm to another. Which of the following statements regarding this transfer is TRUE?
- AThe client must pay federal income tax on the transferred assets.
- BThe client can take possession of the funds for up to 90 days without penalty.
- CThe client must sell all assets in the IRA before the transfer can occur.
- DThe transfer is typically handled as a 'direct rollover' or 'trustee-to-trustee' transfer to avoid taxation.
Show answer & explanationAnswer & explanation
Correct answer: D. The transfer is typically handled as a 'direct rollover' or 'trustee-to-trustee' transfer to avoid taxation.
When an IRA is transferred directly from one trustee to another, it is considered a trustee-to-trustee transfer or direct rollover and is not a taxable event. This method avoids the 60-day rollover rule and potential withholding taxes associated with taking physical possession of the funds.
Why the other options are wrong
- A. A direct transfer or rollover avoids federal income tax on the transferred assets.
- B. Taking possession of the funds triggers the 60-day rollover rule and potential 20% withholding, not 90 days.
- C. Assets can often be transferred in-kind, meaning they do not need to be sold and repurchased.
IRA Trustee-to-Trustee Transfer
A trustee-to-trustee transfer allows IRA assets to be moved directly from one custodian to another without the client taking possession of the funds, thus avoiding taxes and penalties.
- Assets moved directly between custodians.
- Not a taxable event.
- No 60-day rollover rule applies.
- No 20% mandatory withholding.
Memory trick: Direct transfer keeps your IRA tax-free and moving smoothly.