Direct vs Indirect

Direct vs. Indirect Rollovers: Understanding the Difference

How you transfer retirement funds matters significantly. Direct and indirect rollovers have different tax treatments, risks, and timelines. Choosing the right method can save you money and avoid complications.

What Is a Direct Rollover?

In a direct rollover (also called a trustee-to-trustee transfer), funds move from one retirement account custodian directly to another. You never take possession of the money.

How it works:

• You complete paperwork with both the sending and receiving institutions.
• The distribution check is made payable to the new custodian “for benefit of” (FBO) you.
• Funds transfer electronically or by check—but either way, you don’t control the money.
• No taxes are withheld.
• No time limit for completion.

What Is an Indirect Rollover?

In an indirect rollover, you receive the distribution personally and then deposit it into the new account yourself.

How it works:

• You request a distribution from your current account.
• The check is made payable to you (with 20% mandatory federal withholding from employer plans).
• You have 60 calendar days to deposit the funds into a qualified retirement account.
• To complete a full rollover, you must replace the withheld 20% from other funds.

Why Direct Rollovers Are Usually Better

When Indirect Rollovers Make Sense

Despite the drawbacks, indirect rollovers have legitimate uses:

• Short-term loan: You can use the funds for up to 60 days as an interest-free loan, as long as you complete the rollover on time.
• Plan doesn’t allow direct transfers: Some older plans have limited rollover options.
• You need time to choose a new custodian: The 60-day window gives you time to research options (though you could also leave funds in the old plan while deciding).