In a direct transfer from one retirement plan to a traditional IRA, the money is transferred from trustee to trustee. This means that the funds move directly from the custodian of the original retirement plan to the custodian of the traditional IRA without passing through the participant's hands.
Here's a step-by-step explanation:
1. The participant initiates the transfer process by instructing the trustee of the original retirement plan to transfer the funds to a traditional IRA.
2. The trustee of the original retirement plan then transfers the money directly to the trustee of the traditional IRA.
3. The funds are deposited into the traditional IRA account without the participant ever receiving the money personally.
By transferring the funds from trustee to trustee, the direct transfer helps to avoid any tax implications or penalties that may arise if the participant were to receive the funds directly. It ensures a smooth and tax-efficient transition of retirement savings from one plan to another.