Table of Contents

Indirect Rollover: Definition, Rules, and Requirements

By

澳洲幸运5官方开奖结果体彩网:Julia Kagan

Updated May 27, 2025

Fact checked by

Suzanne Kvilhaug

Woman looking at a laptop and holding a piece of paper as a calculator sits on her table. — Jamie Grill / Getty Images

What Is an Indirect Rollover?

An indirect rollover is a transfer of funds from a tax-deferred retirement account to an investor, who deposits the funds into another tax-deferred retirement account. This is in contrast to a direct rollover, where funds✃ are moved between accounts wi✤thout the involvement of the investor.

If you take a 澳洲幸运5官方开奖结果体彩网:distribution via an indirect rollover, you must deposit 100% of the funds into a retirement plan or 澳洲幸运5官方开奖结果体彩网:individual retirement account ꦡ(IRA) within 60 days to avoid paying income tax and penalties.

Key Takeaways

An indirect rollover transfers funds from a tax-deferred retirement plan to an investor, who transfers the funds into another tax-deferred retirement account.
With an indirect rollover, the full distribution amount must be redeposited into another 澳洲幸运5官方开奖结果体彩网:qualified retirement account by a deadline—60 days—to avoid income taxes and penalties.
The direct rollover protects your retirement funds from taxes and penalties, since the funds are transferred from the 澳洲幸运5官方开奖结果体彩网:plan administrator to another account without the employee handling the funds.

Understanding an Indirect Rollover

A rollo🥃ver of a retirement account is common when an employee chan﷽ges jobs or leaves a job to start an independent business.

Most of the time, the rollover is direct, to eliminate any risk that the individual will lose the 澳洲幸运5官方开奖结果体彩网:tax-deferred status of the account and owe an early withdrawal penalty as well as income taxes. With a direct rollover, when an employee is due to receive a distribution from a retirement plan, they will ask their employer’s plan administrator to pay the funds directly to another retirement plan or an IRA. This transfer is on the employee’s behalf. ✅;In other words, with a direct rollover, the employee never receives a check or the funds directly.

Though a direct rollover is more common, the employee does have the option of an indirect rollover, which means they will receive the distribution directly. In this case, the employer generally withholds 20% of the amount that is pending transfer in order to pay the taxes due. This money is returned as a 澳洲幸运5官方开奖结果体彩网:tax credit for the year when the rollover process is completed.

60-Day Rollover Rule

An indirect rollover is also called a 澳洲幸运5官方开奖结果体彩网:60-day rollover because the full distribution amount must be redeposited into a 401(k), IRA, or other qualified retirement account within 60 days to avoid taxes and penalties.

Once the money is in the hands of the account holder, it can be used for any purpose for the full 60-day grace period. However, if the person then fails to deposit the full amount of the distribution into another retirement account, the amount not redeposited is subject to tax, and a 10% 澳洲幸运5官方开奖结果体彩网:early withdrawal penalty will be imposed if the person is under the age of 59½.

Important

You must complete the indirect rollover process within 60 days to avoid the tax penalty.

IRS Rules for Indirect Rollovers

Whether there’s a good reason for using the indirect option or not, the Internal Revenue Service (IRS) has two rules that could tജrip up the account holder:

Only one indirect rollover is permitted within a 12-month period. (That means any 12-month period, not a tax year.)
The transfer must be from one account to another account and cannot be split among multiple accounts. If the funds are split into two accounts, the IRS will consider it two indirect rollovers.

Mess up either of these rules, and you’re on the hook for 澳洲幸运5官方开奖结果体彩网:income tax for the entire amount withdrawn, plus the 10% 澳洲幸运5官方开奖结果体彩网:early distribution tax. Also, splitting the money between accounts as described above has an added penalty of its own, where you’ll also owe a 6% 澳洲幸运5官方开奖结果体彩网:excess contribution tax on one of the two accounts every year for as long as the account exists.

Why Use an Indirect Rollover?

Financial advisors and tax adviso♋rs pretty much unanimously advise their clients to always use the direct rollover ওoption, not the indirect rollover.

The only reason to use the indirect rollover is if the account holder has some urgent use for the ꦗmoney, and it can be accomplished without risk within 60 days. For example, someone relocating for a new job may have large immediate expenses that will be reimbursed in time.

What Is an Example of an Indirect Rollover?

Let’s say that Jamaal, who is under the age of 59½, was paid a $10,000 rollover distribution from his 澳洲幸运5官方开奖结果体彩网:401(k) plan. Jamaal’s employer withheld $2,000 from the distribution, meaning Jamaal received $8,000. If Jamaal♏ decided to roll over the funds into another IRA before the ꧙60-day grace period, Jamaal must redeposit the full $10,000 amount into that retirement account.

If Jamaal rolls over the $8,000 that he received into a retirement account, but not the $2,000 that was𒉰 withheld, the $2,000 would be considered a🐽 distribution subject to income taxes and a 10% penalty. On the other hand, the $8,000 would be considered a nontaxable distribution, and no taxes and penalties would be owed.

To avoid taxes and penalties, Jamaal would need to redeposit the full $10,000 distribution amount within 60 days, meaning he would need to come up with $2,000 from other sources.

Is There a Penalty for an Indirect Rollover?

If you complete the rollover correctly, followi🌟ng the IRS rules, then there is no penalty. However, it’s important to note that even though the distribution will have taxes withheld, you must redeposit the full amount of the distribution within the 60-day window. Failure to do so will incur a penal♚ty.

The Bottom Line

If not accomplished properly, an indirect rollover can leave you owing income taxes, an early withdrawal penalty, and even an excess contributions tax. Failing to meet the 60-day deadline is a 🐓common mi🎃stake.

In most cases, it’s wise to avoid an indirect rollover. Make sure to cღonsult with a financial professional to ensure that you’re rolling over your funds correctly.

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