If you want to move money from one retirement account to another, there are 2 ways to do it: a direct rollover and an indirect rollover. Each method has different tax rules. The choice matters. This article explains how each one works and when to use them. When you are ready to start, learn how to move money into your Gusto 401(k).
You can also learn about which distributions are eligible for rollover here.
A direct rollover moves money from one retirement account to another. The funds can be sent in a few ways:
A check mailed directly to your new provider
A check mailed to you, but made out to your new provider for your retirement account
An ACH or wire sent directly to your new provider
Note: At this time, Gusto Retirement does not offer ACH or wire transfers to other providers.
If the check is mailed to you, there is no Internal Revenue Service (IRS) deadline to send it to your new provider. This is because you do not have “constructive receipt” of the funds — you cannot deposit it in your personal account. However, most checks expire after about 6 months. If you hold on to the check past this date, you need to ask the issuing provider to reissue it.
Because your funds move from one retirement account directly to another, there is no federal or state tax withholding. You get the full amount.
There are no limits to the number of direct rollovers you can do in a calendar year.
A direct rollover may be a good option if:
You want to keep your funds in a retirement account
You want a simple way to send money from one provider to another
You want to avoid the risk of a penalty or taxable event
You want to avoid required tax withholding
When you take a cash distribution (or withdrawal) from your retirement account, your funds are paid directly to you. This can be by check, ACH, or wire transfer.
If the distribution is eligible for a rollover, you can send all or some of those funds to another retirement account as an indirect rollover. This includes any withholding.
Important: To qualify as an indirect rollover, you need to deposit the funds into another retirement account within 60 days. If you miss this deadline, any pre-tax amounts will be included in your taxable income for the year. You may also have to pay early withdrawal penalties unless you meet an exemption.
The 60-day window starts the day after:
You get the check (for distributions paid by check)
The amount is deposited into your account (for ACH or wire transfers)
This deadline is usually strictly enforced, so you do not want to miss it.
One main exception to the 60-day rule is a qualified plan loan offset (QPLO). For a plan loan offset to count as a QPLO, all of the following need to be true:
The loan was offset because you left your employer, or the plan terminated
Your loan was in good standing — meaning you were up to date on payments — on the date you left or the plan ended
The loan offset happened within 12 months of that date
If you have a QPLO, you get more time to do an indirect rollover. Instead of 60 days, you have until your tax return due date for that year — plus any extensions you request.
Withholding rules depend on where the distribution comes from:
From an eligible retirement plan (like a 401(k), 403(b), defined benefit, or Thrift Savings Plan) — the plan must withhold at least 20% as federal income tax, plus any required state withholding
From an IRA (traditional, SEP, or SIMPLE) — you can choose to waive withholding
If withholding was applied to your distribution, you need to deposit the entire amount — including any taxes withheld — into your retirement account by the deadline. Otherwise, it becomes a taxable event. The plan cannot return the withheld money because it was already sent to the IRS. To roll over your full distribution, you need to make up the difference from your own money.
For example:
You take a $10,000 cash distribution from your 401(k). You live in a state with no state tax withholding. You do not choose extra withholding above the required 20% federal tax. You get a check for $8,000.
If you want to keep the full $10,000 in retirement savings, you have 60 days to deposit it in a retirement plan or IRA. If you cannot make up the $2,000 withholding, only $8,000 will count as a rollover. The other $2,000 will be included in your income for the year, and may owe the early withdrawal penalty tax. The $2,000 withheld will be applied as a prepayment of federal tax when you file your taxes — just like the amount withheld from your paychecks.
There is no limit to how many indirect rollovers you can do between eligible retirement plans, or between IRAs and eligible retirement plans. However, you can only do one IRA-to-IRA indirect rollover in any 12-month period.
For this rule, all your IRAs count together — including any traditional, Roth, SEP, or SIMPLE IRA. If you take money from your SEP IRA and roll it over to your traditional IRA, you cannot do another IRA-to-IRA indirect rollover for a full 12 months.
A few exceptions to this rule:
Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs do not count toward this limit
If you take multiple distributions within a 60-day period, you can combine them into one indirect rollover
If the distribution was due to a failure of the provider holding the IRA
An indirect rollover may be a good option if:
You want access to the funds as a short-term loan. You have 60 days to deposit them, so you can use that money during that window without interest
You plan to keep the funds, but change your mind within 60 days and want to put the money back in a retirement account
You accidentally asked for the distribution to be made out to yourself instead of your new provider