An alternative to the direct rollover is a 60-day rollover. The old 401(k) fund writes a check directly to the account owner. The account owner has 60 days to deposit those funds into their new 401(k). If they fail to make that deposit within 60 days, the IRS regards the payment as a distribution. The account holder has to pay income tax and, if they’re below the age of 59.5, they also have to pay a withdrawal penalty.
In addition, the amount will be subject to a 20 percent tax withholding. The IRS returns that 20 percent when the account holder files their taxes that year. But the new 401(k) must contain 100 percent of the funds from the old 401(k), including the amount that the IRS withheld.
So if you were moving $100,000 from an old 401(k) to a new 401(k), using a 60-day rollover, you would receive a check for $80,000. But you would need to deposit the full $100,000 into the new 401(k) to avoid the risk of an additional tax penalty.
In general, a direct rollover is preferable, especially if you’re leaving one job without moving to another. It might be tempting to break all ties with your old company, and take a check from your old 401(k) so that you’ll never have to deal with them again. But you’ll only receive 80 percent of your funds, and if you don’t deposit all of it within two months, you might find yourself with a big tax bill. That makes not finding a new job quickly very expensive.