Direct rollover vs. a check in your name: how to avoid the 20% withholding
The same rollover can be tax-free or cost you thousands. The difference is who the check is made out to.
There are two ways to move money out of a 401(k). One is clean. The other works too, but it has a trap built in.
The direct rollover (the clean way)
Your old plan sends the money straight to the new company, either electronically or by a check made payable to the new company "for the benefit of" you. Nothing is withheld, nothing is taxed, and there's no deadline to worry about.
The 60-day rollover (the trap)
If the check is made out to you, the law requires the plan to withhold 20% for federal taxes. You then have 60 days to deposit the full amount into an IRA, including the 20% you never received.
| $100,000 account | Direct rollover | Check to you |
|---|---|---|
| Withheld by the plan | $0 | $20,000 |
| Amount that arrives | $100,000 | $80,000 |
| To avoid tax, you must deposit within 60 days | nothing to do | $100,000 |
| Comes from your own pocket | $0 | $20,000 |
| If you deposit only the $80,000 | n/a | $20,000 is taxed, plus a 10% penalty if under 59½ |
If you do replace the 20%, you get it back as a refund when you file your taxes, which can be many months later. Most people don't have $20,000 sitting around to bridge that gap, which is why the direct rollover is almost always the better choice.
How to request a direct rollover, step by step
- Open the receiving account first. Whether it's an IRA at a brokerage or an IRA annuity with an insurance company, the new company will give you its exact transfer instructions: who the check is payable to, the account number, and the mailing address.
- Contact your old plan. Most let you start online; some need a phone call or a form. Use the words "direct rollover."
- Give them the receiving company's instructions exactly as written.
- If the check is mailed to you but made payable to the new company for your benefit, that still counts as a direct rollover. Just forward it promptly.
- Confirm the money arrived and that it was coded as a rollover. You'll get a Form 1099-R the next year showing the rollover; it should not be taxable.
A few details worth knowing
- Roth 401(k) money rolls into a Roth IRA.
- After-tax contributions (not Roth) can often be split: the after-tax part to a Roth IRA, the rest to a traditional IRA. Ask a tax professional.
- The once-a-year limit on 60-day rollovers applies to IRA-to-IRA moves, not to direct rollovers from a 401(k).
- Timing: most rollovers take 2 to 6 weeks, depending on the old plan.
If you're rolling into an annuity, the insurance company and your agent usually handle most of the paperwork with the old plan for you.
See what your old 401(k)s could pay you each month
Use the free calculator, or take the 2-minute plan check and get your Second Paycheck report. No cost, and nothing to sign.