How does a direct rollover differ from an indirect rollover of my 401(k)?

In a direct rollover, your old plan sends the money straight to your new IRA or 401(k), or issues a check payable to the receiving custodian. No tax is withheld and nothing is reported as income. This is the safe, preferred method.

In an indirect rollover, the check comes to you personally. The plan must withhold 20% for federal taxes, and you then have 60 days to deposit the full original amount into a new account, including making up that withheld 20% from your own pocket, or the shortfall becomes a taxable distribution plus a possible 10% penalty. The IRS also limits you to one indirect IRA-to-IRA rollover per 12 months. Whenever possible, always request a direct rollover to avoid withholding and deadline traps.