What happens to an IRA's tax treatment when a rollover occurs?

When a rollover occurs with an IRA, the tax treatment of the rolled funds retains its originating status, meaning they maintain their pre-tax status until they are withdrawn. This is significant because it allows the funds that have been moved from one retirement account to another to continue to grow tax-deferred.

For example, if funds are rolled over from a traditional IRA into another traditional IRA, those funds remain tax-deferred and are not subject to income tax until the account holder begins withdrawing money during retirement. This characteristic is crucial for maintaining the tax advantage associated with retirement savings.

Choosing this answer reflects an understanding of the tax implications associated with IRAs and how rollovers work within the framework of retirement accounts. Other options incorrectly suggest that tax statuses change immediately or that all new contributions would face taxes, which misrepresents the continuity of tax treatment through the rollover process.