Questions: An employee requested that the balance of her 401(k) account be sent directly to her in one lump sum. Upon receipt of the distribution, she immediately has the funds rolled over into an IRA. What is the tax consequence of the distribution sent to this employee? A. Distribution is subject to federal income tax withholding B. Distribution is subject to a tax penalty C. Distribution is subject to capital gains tax D. Distribution is subject to ordinary income tax

An employee requested that the balance of her 401(k) account be sent directly to her in one lump sum. Upon receipt of the distribution, she immediately has the funds rolled over into an IRA. What is the tax consequence of the distribution sent to this employee?
A. Distribution is subject to federal income tax withholding
B. Distribution is subject to a tax penalty
C. Distribution is subject to capital gains tax
D. Distribution is subject to ordinary income tax

Transcript text: An employee requested that the balance of her $401(\mathrm{k})$ account be sent directly to her in one lump sum. Upon receipt of the distribution. she immediately has the funds rolled over into an IRA. What is the tax consequence of the distribution sent to this employee? A. O Distribution is subject to federal income tax withholding B. O Distribution is subject to a tax penalty C. O Distribution is subject to capital gains tax D. O Distribution is subject to ordinary income tax

Solution

Solution Steps

Step 1: Identify the type of transaction

The employee received a lump-sum distribution from her 401(k) and rolled it over into an IRA.

Step 2: Determine the tax implications of a rollover

A rollover is a transfer of funds from one retirement account to another. A direct rollover, where the funds are sent directly from the 401(k) plan to the IRA, avoids tax withholding. However, in this scenario, the funds were paid directly to the employee.

Step 3: Understand the 60-day rule

When a distribution is made payable to the employee, it is subject to 20% mandatory federal income tax withholding. The employee has 60 days to deposit the full amount of the distribution into a qualified retirement account to avoid taxes. This is referred to as an indirect rollover.

Final Answer A

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