Does an indirect rollover trigger 20% withholding?

The rule

Publication 590-A (2025) says that, generally, if an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. An eligible rollover distribution is generally any distribution of all or part of the balance in a qualified plan, 403(b) or governmental 457 plan, other than required minimum distributions, hardship distributions, certain series of substantially equal payments, corrective distributions and certain loans treated as distributions. The publication notes that the amount withheld is part of the distribution, so withholding reduces the check you receive but still counts as a distribution.

The IRA-to-IRA case

The withholding requirement in the rollover section is framed around employer plans, so an indirect rollover from one IRA to another is a different situation. The publication says the 20% requirement does not apply to distributions that are not eligible rollover distributions, that other withholding rules apply to them depending on whether they are periodic or nonperiodic, and that you can still choose not to have tax withheld; see Publication 505 for the details. If you take IRA money yourself and your custodian withholds, you must replace the withheld amount from other funds to roll over the whole distribution.

Exceptions

The payer does not have to withhold if the distribution, together with all previous eligible rollover distributions you received during the tax year from the same plan (or at the payer’s option from all your employer’s plans), totals less than $200. No withholding is required either if the distribution consists solely of employer securities plus cash of $200 or less in lieu of fractional shares. A plan also is not required to offer the direct rollover option if your eligible rollover distributions are expected to total less than $200 for the year.

Worked example

You leave your job and request $50,000 from your 401(k), made payable to you. The plan must withhold 20%, which is $10,000, and sends you $40,000. To avoid any tax you must roll over the full $50,000 within 60 days, so you deposit the $40,000 check plus $10,000 from your savings. The $10,000 withheld is then credited against your tax when you file. If you deposit only the $40,000, the $10,000 you did not roll over is taxable that year, and if you are under 59½ it may also carry a 10% additional tax of $1,000. Enter these numbers in the calculator above to see the same result.

The direct rollover alternative

Table 1-5 in the publication compares the two paths. With a payment to you, the payer must withhold 20% of the taxable part; with a direct rollover there is no withholding. With a payment to you, a 10% additional tax may apply to the taxable part, including an amount equal to the tax withheld, that is not rolled over; a direct rollover has no additional tax. For a payment to you, any taxable part not rolled over is income that year, while after a direct rollover the taxable part is not income until later distributed from the IRA. The publication concludes that if you decide to roll over any part, the direct rollover option will generally be to your advantage. If you choose it and any part is still paid to you, the payer must withhold 20% of that part’s taxable amount.

Related points

Rollovers from an employer plan are not subject to the once-a-year limit that applies to IRA-to-IRA rollovers: see the one-rollover-per-year rule. You must still meet the 60-day deadline described in the 60-day rule guide. If you do not plan to roll anything over, a lump-sum distribution may qualify for special treatment on Form 4972, but rolling over any part ends that option. For the early-withdrawal tax see the 401(k) early withdrawal penalty calculator.

Sources

• IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) (2025): Rollover From Employer’s Plan Into an IRA; Withholding requirement; Direct rollover option; Table 1-5. Read November 2, 2026.

Edition read: Publication 590-A (2025), for use in preparing 2025 returns, including its What’s New for 2026 note. Dollar limits and dates are for the year stated; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.