Rollovers
Direct Rollover vs. Indirect Rollover vs. Transfer: Moving Retirement Money Tax-Free
You can move retirement money between accounts in three ways, and they aren't equally safe. Two of them keep the money out of your hands. The third hands you a check and starts a clock.
What to remember
- A direct rollover or trustee-to-trustee transfer sends money straight between accounts, with no tax withheld.
- An indirect rollover puts the money in your hands first, and you've got 60 days to deposit it.
- When a 401(k) pays you directly, it has to withhold 20%, and you'll need to replace that from other savings to roll over the full amount.
- You get one indirect IRA-to-IRA rollover in any 12-month period, counting all your IRAs together.
- Form 1099-R and Form 5498 report the move to the IRS. Keep both with your tax records.
Three ways to move the money
People toss around "rollover" and "transfer" as though they're the same thing. The IRS doesn't see it that way, and the difference can show up on your tax bill.
- Direct rollover. Money goes from an employer plan, such as a 401(k) or 403(b), straight to an IRA or another plan.
- Trustee-to-trustee transfer. Money goes from one IRA directly to another IRA of the same type.
- Indirect rollover. Money is paid to you, and you deposit it in a new account within 60 days.
Only the third one puts the money in your hands. That's where nearly all the trouble starts, because a check made out to you comes with withholding you didn't ask for, a deadline the IRS waives only in narrow cases, and a once-a-year limit that's easy to trip over.
| Direct rollover | Trustee-to-trustee transfer | Indirect rollover | |
|---|---|---|---|
| Typical use | 401(k) or other plan to IRA or plan | IRA to IRA of the same type | Any eligible move, with money paid to you first |
| Money passes through your hands? | No | No | Yes |
| Tax withheld? | No | No | 20% from employer plans; 10% by default from IRAs unless you choose otherwise |
| 60-day deadline? | No | No | Yes |
| Once-per-12-months limit? | No | No | Yes, for IRA-to-IRA rollovers |
The direct rollover: what we'd ask for
Simple. Your old plan sends the money to your new IRA or plan. You fill out the old plan's distribution paperwork, check the box for a direct rollover, and give them the name of the receiving custodian and your new account number. That's it.
Sometimes the money moves electronically. Sometimes the plan mails a check, even to your house, and it's still a direct rollover as long as it's payable to the new custodian and not to you.
How should the check be made out?
Payable to the new custodian "for the benefit of" you. Something like this:
[Name of new custodian] FBO [Your name], IRA account #[number]
"FBO" stands for "for the benefit of." Your new custodian will tell you the exact wording and mailing address they want. If a check shows up made out to you personally, don't deposit it. Call the plan first.
The trustee-to-trustee transfer
This one moves money between IRAs of the same type, say one traditional IRA to another. The old custodian sends it directly to the new one.
You'll start it from the new custodian's side, in most cases: fill out their transfer form, and they go get the money from your old IRA. Nothing gets withheld. Not one cent. You can do as many as you like in a year, and the once-per-year rollover limit described below doesn't touch them.
It's the standard way to move an existing IRA to a new custodian, including a self-directed custodian for a gold IRA.
The indirect (60-day) rollover, and why it bites
Here the money is paid to you. From the day you receive it, you have 60 days to get it into an IRA or eligible plan. Make the deadline and it's tax-free. Miss it, and unless the IRS grants a waiver, whatever you didn't deposit becomes taxable income.
Under 59½? It gets worse. The amount you keep can also draw a 10% early withdrawal penalty unless an exception applies.
Where did 20% of my 401(k) check go?
When an employer plan pays an eligible rollover distribution to you, the law requires it to withhold 20% for federal income tax. You can't opt out.
Say you have $100,000 in a 401(k) and ask for a check made out to you. You'll get $80,000, and the other $20,000 goes straight to the IRS as withholding before the check ever reaches your mailbox.
- To roll over the full $100,000, you have to deposit $100,000 within 60 days, which means coming up with $20,000 from other savings.
- Deposit only the $80,000, and the missing $20,000 is treated as a taxable distribution, possibly with the 10% penalty if you're under 59½.
- The withheld $20,000 is credited toward your taxes when you file. You might get some or all of it back as a refund, but not until then, which could be months away.
That's a real mess. A direct rollover skips every bit of it.
What if I miss the 60-day deadline?
The IRS can waive it in some cases, like a serious illness or a mistake by the financial institution, and there's a self-certification process for certain listed reasons. We wouldn't plan around either. See the IRS page on waivers of the 60-day rollover requirement.
The one-rollover-per-year rule
You can make only one indirect rollover from one IRA to another IRA in any 12-month period. It's a rolling 12 months. Not a calendar year.
And it counts all your IRAs together: traditional, Roth, SEP, and SIMPLE. Five IRAs still gets you one indirect IRA-to-IRA rollover in 12 months.
Picture it this way. You take a check from one IRA in March, redeposit it within 60 days, and then in the fall you try the same thing with a different IRA. That second one breaks the rule, even though the accounts are different and each move was on time.
The rule does not apply to:
- Trustee-to-trustee transfers between IRAs
- Rollovers from a 401(k) or other employer plan to an IRA
- Rollovers from an IRA to an employer plan
- Conversions from a traditional IRA to a Roth IRA
Breaking it gets expensive. The second rollover can be treated as a taxable distribution, and if the money went into an IRA anyway, it can also count as an excess contribution, which carries its own penalty every year until it's fixed. IRS Publication 590-A has the details.
Moving Roth money
Roth money belongs in a Roth account. A Roth 401(k) can roll to a Roth IRA, or to another employer's Roth 401(k) if that plan takes it. A Roth IRA moves to another Roth IRA by trustee-to-trustee transfer.
Two things trip people up. First, Roth IRAs have their own five-year rule for tax-free earnings, and years spent in a Roth 401(k) don't count toward a Roth IRA's five-year clock, so if you've never had a Roth IRA, opening one early gets that clock started. Second, moving traditional (pre-tax) money into a Roth account is a conversion. That's allowed. But the converted amount is taxable income for that year.
Roth rules have a lot of moving parts, and the five-year clocks in particular catch people who assumed their years in a workplace Roth would carry over automatically. If any of this applies to you, IRS Publication 590-A and 590-B are good references, and a tax professional can help.
Which tax forms will I get?
Moving money creates paperwork even when you owe nothing. Just two forms.
Form 1099-R
The account sending the money issues Form 1099-R, by the end of January of the following year. It reports what left the account, and a code in Box 7 tells the IRS what kind of distribution it was. A direct rollover from a plan is coded so it shows as non-taxable.
Trustee-to-trustee transfers between IRAs usually don't produce a Form 1099-R. Indirect rollovers do, and you'll report the rollover on your return to show it wasn't taxable.
Form 5498
The receiving account issues Form 5498. It reports contributions and rollovers into the IRA. It shows up by the end of May. That's after the filing deadline, so you won't have it when you file. That's perfectly normal.
Our six-step routine for a clean move
- Open the receiving account first so you have an account number.
- Ask the receiving custodian for their exact payee wording and mailing address.
- For a 401(k), request a direct rollover. For an IRA, request a trustee-to-trustee transfer.
- Keep a copy of every form you sign.
- Confirm the money arrived and is invested the way you meant it to be.
- File away your Form 1099-R and Form 5498 when they come.
Still deciding whether to move your 401(k) at all? Start with your four choices for an old 401(k). If you're heading for a self-directed IRA, our guide to what happens after you request a kit lays out the usual steps.
Common questions
Is a rollover taxable?
Not when it's done correctly and the money stays the same tax type, like traditional to traditional. The problems come from missed deadlines, the 20% withholding gap, or breaking the once-per-year rule.
Can I do more than one transfer in a year?
Yes. Trustee-to-trustee transfers between IRAs and direct rollovers from employer plans have no annual limit. The once-per-12-months limit applies only to indirect IRA-to-IRA rollovers.
The check from my 401(k) was mailed to me. Did I do something wrong?
Not necessarily. Look at who it's payable to. If it's made out to your new custodian for your benefit, it's a direct rollover and you just forward it. If it's made out to you, the 60-day clock and withholding rules apply.
How long does a rollover or transfer take?
Plans differ. Many finish in one to three weeks, but some drag on longer, especially when paperwork needs a signature guarantee or the old plan mails a check. Following up with both sides helps.
Can I roll over a required minimum distribution?
No. RMDs aren't eligible for rollover. If you've reached RMD age, take that year's RMD before you move the rest. Our RMD guide explains the timing.
We base our guides on primary sources such as the IRS, the Department of Labor, and federal regulators. Read our editorial policy. Spot an error? Tell us.
