Which of the following statements is false regarding a direct rollover option distribution?

In the context of a direct rollover option distribution, the statement that the taxpayer must pay withholding tax on the amount being rolled over is false because, with a direct rollover, the entire amount is transferred directly from one retirement account to another without being subject to withholding tax. This means that as long as the funds are rolled over correctly into another qualified retirement account, no tax liability is incurred at the time of the rollover, and no taxes are withheld from the distribution.

This is in contrast to situations where a distribution is taken as cash, in which case the IRS typically mandates that a certain percentage be withheld for taxes unless the taxpayer opts for direct rollover. Thus, a direct rollover preserves the tax-deferred status of the withdrawn funds, allowing the taxpayer to avoid any immediate tax implications or penalties associated with early withdrawal. Furthermore, taxpayers have the flexibility to roll over part or all of the distribution as they choose without triggering any tax liabilities.