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If a penalty, then could he just roll that over to an IRA to avoid the penalty?
Yes. Doing a direct transfer would also avoid the withholding.
If no penalty, I would think that paying the taxes on it now and putting it in his Roth IRA would be a better choice for him.
That sounds best to me too, given his low current tax rate.

Maybe something isn't coming through correctly on the translation. Since there is a penalty, how would it sound best to you?

It seems that the best route would be to do a rollover to a traditional IRA, then convert the traditional IRA to a Roth IRA due to his current low tax rate. That may be what you are saying but it was confusing in how it was worded.

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