Question 42

An employee who resigns and receives $15,000 from a qualified plan can deposit the available funds into a rollover individual retirement annuity (IRA).

This scenario is appropriate for a rollover IRA because the employee is moving funds from a qualified retirement plan, which allows for the transfer into an IRA without incurring taxes or penalties.

A) A student who receives $20,000 as a life insurance death benefit

This option is incorrect because life insurance proceeds are not considered qualified retirement plan distributions and cannot be rolled over into a retirement account like an IRA.

B) A self-employed person who has $5,000 to invest for retirement

While this individual is looking to invest for retirement, the $5,000 does not come from a qualified retirement plan. Therefore, it cannot be deposited into a rollover IRA without any prior rollover funds.

C) An employee who resigns and receives $15,000 from a qualified plan

This option is correct as it describes an employee who is eligible to roll over funds from a qualified retirement plan into a rollover IRA. This process allows for tax-deferred growth and avoids penalties.

D) An individual who receives $10,000 from a lottery

This option is incorrect because lottery winnings are not qualified retirement funds and do not qualify for rollover into an IRA. This type of income is subject to taxes and cannot be transferred in the same manner as retirement plan distributions.

Conclusion

The correct choice, C, highlights the eligibility criteria for rolling over funds into a rollover IRA, specifically requiring that the funds originate from a qualified retirement plan. Options A, B, and D fail to meet this criterion, demonstrating that only funds from qualified plans can be transferred without tax implications.