Rolling Over Your Retirement? Here's Why Direct Beats Indirect (Most of the Time)

Moving retirement funds between accounts sounds simple—but the method you choose can cost you thousands in taxes and penalties.

The quick version: Direct rollovers = money transfers straight between accounts, zero taxes, zero hassle. Indirect rollovers = you get a check, lose 20% to withholding, and have exactly 60 days to fix it or face penalties.

The 20% Tax Trap

With an indirect rollover, if you’ve got $100k in your 401(k), your employer cuts you a check for $80k and withholds $20k upfront. Now you have to scrape together that $20k from your own pocket to deposit the full $100k within 60 days—or that $20k becomes taxable income plus a 10% early withdrawal penalty if you’re under 59½.

Directly? All $100k moves to your IRA untouched. Done.

The “Once Per Year” Gotcha

Trying to do multiple indirect rollovers? The IRS says you’re limited to one per 12 months. Direct rollovers? No limit. Another win for the straightforward route.

When Indirect Might Make Sense

The only real advantage: temporary access to cash. But it’s a risky game—miss that 60-day deadline and your retirement nest egg shrinks fast.

Bottom line: Unless you desperately need short-term liquidity, direct rollover is the obvious choice. Fewer moving parts, fewer ways to mess up your taxes.