401(k) rollover glossary
Indirect Rollover
An indirect rollover sends a check to you personally. Your custodian withholds 20% for federal taxes automatically, and you have 60 days to deposit the full gross amount — including the withheld 20% — into the destination account.
An indirect rollover happens when your old custodian issues a check made payable to you — not to the destination institution. The moment that check is in your name, the IRS treats it as a distribution.
Federal law requires the custodian to withhold 20% for federal income taxes before issuing the check. If your 401(k) had $100,000, you receive $80,000. To complete a full rollover, you must deposit the entire original $100,000 into the new account within 60 days — which means you have to come up with the missing $20,000 from your own cash.
If you deposit only the $80,000 you received, the missing $20,000 is treated as a taxable distribution for the year. You will owe ordinary income tax on it, plus a 10% early-withdrawal penalty if you are under 59½. The withheld 20% is eventually returned as a tax refund — but only if you file correctly.
Indirect rollovers are subject to the 60-day rollover rule. You have exactly 60 calendar days from the date the check was issued to deposit the funds into a qualifying account. Missing this deadline converts the entire amount into taxable income.
You are only allowed one indirect rollover per 12-month period across all your IRAs. A second indirect rollover within the same year — even from a different account — violates IRS rules and the funds become fully taxable.
Avoid indirect rollovers whenever possible. Always request a direct rollover (custodian-to-custodian transfer) to prevent the 20% withholding and eliminate the 60-day deadline.
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Frequently asked questions
- I already received a check — what do I do?
- Count 60 days from the date on the check. If you are still within that window, deposit the full gross amount (not just what you received) into a qualifying IRA or 401(k). Front the missing 20% from savings — you will get it back as a tax refund. If you are past 60 days, see the missed-deadline diagnostic for IRS self-certification options.
- Why did my custodian send a check instead of doing a direct transfer?
- Some custodians default to indirect rollovers unless you specifically request a direct rollover. Call back and ask for a direct trustee-to-trustee transfer. If the check has already been issued but not cashed, ask if you can return it and request a direct transfer instead.
- Does the one-rollover-per-year limit apply to direct rollovers?
- No. The one-per-year limit applies only to IRA indirect rollovers. Direct rollovers (custodian-to-custodian) are not subject to the annual limit. You can do unlimited direct rollovers in a year.
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This glossary entry provides educational information based on IRS rules. It is not tax or legal advice for your specific situation.