Colorado Life Producer License Practice Test

If an employee quits their job and receives $10,000 from a qualified plan, how much can they roll over tax-free to a traditional IRA?

1. $10,000

2. $8,000

3. $7,200

4. $6,000

The correct answer is: $8,000

When an employee receives a distribution from a qualified retirement plan upon quitting their job, they have the option to roll over that amount into a traditional IRA. The entire distribution is eligible for rollover, but tax implications depend on how the distribution is handled. In this case, if the employee received $10,000 from the qualified plan, the actual amount they can roll over tax-free to a traditional IRA would typically be the full $10,000. However, if the employee has received the distribution as a cash payout, typically, the employer is required to withhold a mandatory federal income tax of 20% for distributions that are eligible for rollover. This means that if the employee takes the distribution directly, they will receive only $8,000 after the 20% withholding ($10,000 - $2,000 = $8,000). To roll over the entire $10,000 without penalty or taxation, the employee would need to replace the withheld $2,000 from other funds into the IRA, or explicitly instruct to roll over the entire $10,000 directly without receiving a payout. If they do not replace this amount, they can only roll over the net amount received—thus $8,000 can be rolled over tax-free