In a direct rollover, how is the money transferred from one plan to the new one?

In a direct rollover, the transfer of funds occurs from one qualified retirement plan directly to another qualified retirement plan, without the participant taking possession of the money. This method is designed to maintain the tax-deferred status of the retirement funds, which is crucial for avoiding immediate taxation on the distribution.

When the transfer happens from trustee to trustee, it ensures that the funds are handled by the financial institutions or entities involved, thereby minimizing the risk of withholding taxes or penalties that may apply if the participant were to receive the funds directly. This approach is beneficial because it helps retain the funds' qualified status, ensuring the employee can continue to save for retirement without interruptions or consequences related to taxes.

Other answer choices suggest processes that do not accurately describe a direct rollover. For instance, transferring from the participant or involving the original custodian suggests that the participant has control over the funds, which undermines the purpose of a direct rollover. Therefore, the correct understanding hinges on the seamless transfer between custodians, highlighting the importance of adhering to IRS regulations regarding retirement account distributions.