Two ways to move the money
Direct vs. Indirect Rollover
A direct rollover moves retirement money custodian-to-custodian. It is not treated as a distribution paid to you, so nothing is withheld and no deadline starts. An indirect rollover puts a check in your name: an employer plan must withhold 20% for federal tax, and the 60-day rollover clock starts the day the money is received.
Side by side
| Direct rollover | Indirect rollover | |
|---|---|---|
| Who holds the money | Custodians only — funds move institution-to-institution (an FBO check counts). | You — the check is payable to you personally. |
| Federal withholding | None. | 20% mandatory from an employer plan; 10% default from an IRA (that one can be declined). |
| The 60-day clock | Never starts — not treated as a distribution to you. | Starts the day the money is received; 60 calendar days to redeposit the gross amount. |
| One-per-12-months rule | Doesn't apply — unlimited transfers. | Applies to IRA-to-IRA rollovers only (all IRAs aggregated); plan-to-IRA is exempt. |
| What can go wrong | Slow processing; a check mis-issued in your name turns it indirect. | Missed deadline; depositing only the net 80%; a second IRA-to-IRA rollover inside 12 months. |
How a direct rollover works
The old custodian sends the money straight to the new one — by wire, ACATS, or a check made payable to the receiving institution. Because the funds are never paid to you, the IRS doesn't treat the move as a distribution: no mandatory withholding, no 60-day deadline, no use of the once-per-year IRA rollover slot. The plan reports it with Box 7 code G on the 1099-R (code H for a designated Roth 401(k) going to a Roth IRA).
One wrinkle: many 401(k) plans still "transfer" by mailing a paper check — to you. That is still a direct rollover as long as the payee line names the new custodian, for example "Schwab, FBO Jane Doe." The IRS regulation is explicit that handing you a check payable to the receiving trustee is an acceptable way to make a direct payment. The failure mode is a check payable to you — that single difference in the payee line is what flips the whole transaction to indirect.
How an indirect rollover works
The plan pays you, withholds 20% for federal tax (mandatory on employer-plan distributions, per the IRS, "even if you intend to roll it over later"), and from the day of receipt there are 60 calendar days to deposit the gross amount into an eligible account. On a $100,000 balance that means an $80,000 check — and a $100,000 deposit, with the missing $20,000 fronted from other funds and the withheld tax recovered on that year's return. Anything short of the gross amount is treated as a distribution: taxable, plus a 10% additional tax if the owner is under 59½. The 60-day rule guide walks through the full math and the relief paths if the deadline has already passed.
When indirect happens anyway
Almost nobody chooses an indirect rollover; it usually happens to people. The common routes in:
- Custodian defaults.Some plan administrators mail a check in the participant's name unless a direct rollover is explicitly requested — the paperwork default, not the participant's intent, decides the outcome.
- The check is already cut. A termination packet gets processed, a cash-out box gets ticked, and the envelope shows up before anyone asked how the payee line reads.
- Small-balance force-outs. Plans can push out small accounts of former employees; depending on the balance and plan terms, that can arrive as a check rather than an automatic IRA transfer.
Once it has happened, the rules are workable — 60 days is a real window, and depositing the gross amount preserves the full tax deferral. The two things that decide the outcome from here are the date received and the deposit amount. The deadline calculator pins down the exact date →
Common questions
Is a check made out to the new custodian (an FBO check) direct or indirect?
Direct. Under IRS regulations, a check payable to the receiving trustee or custodian for your benefit — for example, 'Fidelity, FBO Jane Doe' — is a direct rollover even when it's mailed to you to deliver. What makes a rollover indirect is a check payable to you personally.
Does the one-rollover-per-year rule apply to direct rollovers or 401(k)-to-IRA rollovers?
No to both. The once-per-12-months limit applies only to IRA-to-IRA 60-day rollovers. Trustee-to-trustee transfers, employer-plan-to-IRA rollovers (even indirect ones), IRA-to-plan rollovers, and Roth conversions are all outside the limit, per the IRS.
A check made out to me already arrived — is the direct route gone?
For that check, mostly yes: once a plan pays you personally, the 20% has already been withheld and the 60-day clock is running from receipt. Completing a full rollover means depositing the gross amount — including the withheld portion — within 60 days. Some custodians will void an uncashed check and reissue it as a direct transfer, which is worth a phone call before depositing anything.
How does each type show up on the 1099-R?
A direct rollover from a plan is reported with Box 7 code G (or code H for a designated Roth 401(k) rolled to a Roth IRA), with no tax withheld. An indirect rollover is reported like a distribution paid to you — commonly code 1 or 7 with the withholding in Box 4 — and the rollover itself is then reported on that year's Form 1040.
Get the direct route mapped for your custodian
The nesthelm plan generates custodian-specific transfer instructions — the right form, the right payee wording, the right timing — so the rollover stays direct from the first phone call.
~3 minutes · no account · free preview
Keep reading
This comparison provides educational information about IRS rollover rules as they stand in 2026. It is not tax, legal, or financial advice for your specific situation — withholding and deadline mistakes are frequently irreversible, so verify with a CPA or tax professional before acting.