There are two main ways to move money from your workplace retirement plan when you leave your job. One can cost you.

The best way to handle rollovers from old plans is with a direct rollover.

Dear Dan,

I was waiting at a bar for a dinner table and the guy I was chatting with was pretty upset about his tax bill. He said he expected a tax-free transaction, but when he took his 401(k) after being laid off, the company withheld a bunch for taxes. He then took a big tax hit even though he put what he received into an IRA. Is that possible? Can ex-employers just withhold money like that?

-Concerned bystander

Dear Concerned,

Yes, it is definitely possible he got an unpleasant tax bill. As is often the case with stories told at bars, we are missing some details, so it is hard to say exactly what happened.

The best way to handle rollovers from old plans is with a "direct" rollover. Sometimes you'll see the term "trustee-to-trustee" transfer, which works the same way. With a direct rollover, the funds move directly from your old 401(k) plan to a new 401(k) plan or IRA. The money is sent straight to the new account, or a check is delivered to the ex-employee but made payable to the new entity. It might read something like, "XYZ Financial for benefit of the John Doe IRA."

The direct method is simple and avoids several tricky rules that apply to indirect rollovers. A direct rollover has no immediate tax implications, does not require withholding, and is not subject to the one-rollover-per-12-month rule. You can do as many direct rollovers as you like, as often as you like.

My suspicion is the guy you mention didn't review the paperwork carefully and moved his money through an "indirect" or "60-day" rollover.

With an indirect rollover, the funds are distributed directly to the employee, who then deposits them into a new 401(k) plan or IRA. If that isn't done within 60 days, taxes will be due. With an indirect rollover, the check is made payable to the former employee, is treated as a distribution and is subject to mandatory 20% tax withholding. By law, the former employer has no choice but to withhold that amount.

Let's say a $100,000 401(k) is moved to an IRA by indirect rollover. The former employee would receive a check for $80,000. If he does not get the money into an IRA within 60 days, or if he has done another indirect rollover within the past 12 months, he will have taken a $100,000 distribution taxed as ordinary income.

Even if he deposits the $80,000 into an IRA within 60 days, the distribution was $100,000 but only $80,000 was deposited. That leaves $20,000 of taxable income. I can't blame anyone who feels unfairly treated in this scenario: They owe tax on $20,000 they didn't ask to be withheld and never had possession of the funds. Nonetheless, that's the law.

Also, for those under age 591/2, distributions can trigger a 10% premature distribution penalty on top of the taxes. That could certainly generate some colorful language at a bar.

The bottom line: Use the direct-rollover method when moving money from one tax-deferred account to another.

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-Dan Moisand

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July 19, 2026 10:45 ET (14:45 GMT)

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