What Is an Indirect Rollover?

Indirect Rollovers Explained in Less Than 4 Minutes

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An indirect rollover is when you take a pre-retirement payment from a retirement plan or IRA and deposit it into another retirement plan. When making an indirect rollover, you will receive a direct payment, with a 60-day window to deposit the funds into a new retirement account. 

By rolling over a distribution, your money continues to grow with tax advantages. But you need to understand the rules of indirect rollovers to avoid a big tax bill or penalties. So you’ll have to use other funds in order to deposit the full amount of the distribution into a new retirement account. 

Definition and Examples of Indirect Rollovers


An indirect rollover is when you withdraw funds from one retirement account and receive a payment to deposit all or a portion of it into another retirement account within 60 days.

When you get a distribution for an indirect rollover, taxes will be withheld from your payment.

  • Alternate name: 60-day rollover

You might want to complete a rollover when you change jobs or leave a job to start your own business. For example, if you have money with a past employer in a 401(k), you can usually do a direct or indirect rollover by moving the money into a new 401(k), an IRA, or another qualified retirement plan.

Other common types of retirement plan rollovers include direct rollovers. With direct rollovers, the financial institution or plan administrator would deposit the payment directly into another retirement account. In these cases, no taxes are withheld from the transfer amount.

Most IRS-approved retirement savings plans also allow distributions to be “rolled over” to another retirement account, however, there are some restrictions depending on the type of account. For example, you cannot roll over funds from a Roth IRA to a Traditional IRA.

How Does an Indirect Rollover Work?


The Internal Revenue Service (IRS) determines which accounts are eligible for rollovers, and sets penalties and other rules concerning tax-deferred retirement plans. In general, rolling over a retirement distribution allows it to keep growing with its tax advantages. With indirect rollovers, however, there are a few caveats.

Let’s say you take a direct payment of $20,000 for an indirect rollover. Before sending you a check, your plan administrator will automatically withhold 20%, or $4,000. When you reinvest the money, you’ll have to make up the $4,000 from elsewhere in order to deposit (and defer taxes for) the full $20,000. Any amount that you don’t redeposit is subject to 20% income tax, plus an additional 10% tax for early distributions if you’re under age 59 ½.

If your account balance is under $1,000, you can’t roll it over. Instead, the plan administrator will generally send you a check for the amount, minus 20% for mandatory income tax withholding.

Another rule to look out for is the IRS’ one-rollover-per-year limit regarding IRAs. It states “you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.” There are some exceptions, including Roth conversions and trustee-to-trustee transfers. 

If you violate the one-rollover-per-year rule, all additional distributions will be treated as taxable income. Plus, you may be subject to the 10% early withdrawal penalty and/or an excess contribution penalty of 6% annually.  

Is an Indirect Rollover Worth It? 

Due to these rules and penalties that can confuse people up during an indirect rollover, many people opt for the direct rollover option, which is simple and straightforward.

With a direct rollover the money goes directly from one account to another and the account owner never receives it directly, and there’s virtually no risk of making a costly mistake.

An indirect rollover, if necessary, allows you to use the money for any purpose during the 60-day grace period. Indirect rollovers can be handy if you have an urgent use for the money now, and you know you can pay it back within 60 days. 

But the rules can be tricky, and mistakes can cost you. So, proceed with caution when doing an indirect rollover.

Key Takeaways

  • With indirect rollovers, you must deposit the payment into another retirement plan or IRA within 60 days to avoid tax penalties.
  • Indirect rollovers are subject to automatic tax withholding, so you have to replace the withheld funds when you roll over to maximize tax advantages. 
  • Direct rollovers move money directly from one account to another without any tax withholdings.
  • Use indirect rollovers carefully. If you don’t follow all the IRS rules correctly, you face penalties.