Direct Rollover vs Indirect Rollover

The definition of a rollover is when money is moved from one type of retirement account to a different type of retirement account. The two options available to you are a direct or indirect rollover. But what are the differences between these?

A direct rollover is simpler than an indirect rollover since it has no tax implications from the IRS. It should be as easy as filling out the correct paperwork to get the money transferred into the new account. 

An indirect rollover is a little more complicated since it might have tax implications from the IRS. Through an indirect rollover, the administrator of your retirement account will cash out your account and send you a check. The check will withhold either 10% or 20% depending on the type of retirement account you participated in.

This example will provide a better understanding of both choices. Let’s say you terminate your employment with Company A and start a new job with Company B. You had a 401(k) with Company A and are looking to move that money to the 401(k) with Company B. If Company B allows you to rollover that money into their 401(k), then this would be accomplished through a direct rollover. If Company B doesn’t allow contributions, then you can still use a direct rollover but it would have to be into a self-directed, Individual Retirement Account (IRA).

Through an indirect rollover, the administrator of Company A would send you a check in the form of a rollover distribution. This rollover distribution will become taxable income unless you deposit the funds into a qualified retirement account within 60 days of the distribution. Therefore, the administrator withholds a percentage for taxes. The standard amount withheld is 10% for IRA’s and 20% for 401(k)’s and other employee sponsored plans. If you do deposit your distribution into a qualified retirement account, you will also have to add the amount deducted for taxes from personal funds.  It is not sufficient to just deposit the net amount received.  You must add the tax amount for the rollover to be considered valid. 

For example, if you have $100,000 in your 401(k) and requested an indirect rollover, the administrator would send you a check for $80,000 and withhold 20% or $20,000.   This $20,000 would be sent to the IRS for taxes.   Again, you have 60 days to rollover these funds into a retirement account, without the tax implications.  Remember, the full amount of the original 401(k) needs to be reinvested. In this case, you would need to deposit $100,000 into a retirement account. This means you need to add $20,000 of personal funds in addition to the distribution amount of $80,000. Once this was completed, you would have to wait until you filed your tax return to request a refund of the $20,000 sent to the IRS. 

There is an additional penalty for distributions to individual’s younger than 59 ½ years old. The IRS can inflict another 10% penalty on your 401(k) since this is considered an early distribution.


Overall, when it comes to rollovers, a direct rollover is by far easier and less confusing than an indirect rollover. Distribution paperwork can be intimidating and often complicated.  It is important to complete it properly or it can result in substantial tax implications.  We have the expertise and experience to assist you with your retirement rollovers.  We have helped countless individuals properly rollover their retirement funds.  Let us help you. Contact us with any questions. 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.

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