The short answer
If your old plan pays the money to you, instead of sending it straight to the new plan or IRA, it has to withhold 20% for federal taxes. That’s true even if you intend to roll over every dollar. You then have 60 days to deposit the full amount, including the 20% you never received.
A quick example
Say your old 401(k) holds $40,000, and the plan cuts the check to you.
- Withheld: $8,000 goes to the IRS
- Your check: $32,000.
- To roll over the full $40,000: You have 60 days, and you need to come up with the missing $8,000 from somewhere else (yikes).
If you do, the $8,000 that was withheld counts as taxes paid on your return for that year.
If you only deposit the $32,000, the $8,000 you didn’t roll over is treated as a distribution. It’s taxable, and if you’re under 59½, there’s generally a 10% penalty on top unless an exception applies. The $8,000 withheld still counts as taxes paid, so it goes toward that bill.
What if you miss the 60 days?
The IRS can waive the 60-day deadline in certain situations, such as when it was missed because of circumstances beyond your control. That’s a safety net, not a plan.
The cleaner route
A direct rollover, where the old plan sends the money straight to the new plan or IRA. No check made out to you, no 20% withholding, no 60-day clock. A check made payable to the new plan or IRA, rather than to you, works the same way.
It’s a small detail on a form that can make a big difference, and it’s the kind of thing that’s easy to miss when you’re juggling a job change.
Where that leaves you
Where the money should land comes down to what you want it to do, and when. That depends on the plans involved, your age, and your tax picture, and that’s where we can actually help.
For the four options with an old 401(k), and how to find one you’ve forgotten, see Old 401(k)s: What to Do With the Ones You Left Behind
You know where to find me.
Sources
- 20% mandatory withholding, 60-day rule, withheld amount reported as taxes paid, direct rollovers and checks payable to the receiving plan, waivers of the 60-day rule: IRS, “Rollovers of retirement plan and IRA distributions”
- 10% penalty and exceptions: IRS, “Retirement topics – Exceptions to tax on early distributions”