How does a lump sum rollover work?

A lump sum rollover is a process that allows an individual to transfer assets from one qualified retirement plan to another without incurring immediate tax consequences. This mechanism is crucial for maintaining the tax-deferred status of retirement savings. When assets are rolled over directly to another qualified plan, such as from a 401(k) to an IRA or to another employer's retirement plan, the funds are not subject to income tax at the time of the transfer. This feature encourages individuals to keep their retirement savings intact, promoting long-term growth without the penalty of taxation during the rollover process.

The ability to carry over funds in this manner helps ensure that savers can continue to build their retirement nest egg without losing money to taxes or penalties. In contrast, other options, such as withdrawing funds for personal use, would trigger tax implications and potentially penalties, while option C is not relevant as it involves the conversion of benefits rather than transferring retirement assets. Similarly, distributing assets as a cash payment does not preserve the tax-deferred status that a rollover aims to maintain.