Process

• The IRS requires your employer to withhold 20 percent of your retirement account balance when you transfer money from one retirement account to another, using an indirect rollover. This money is sent to the IRS for the payment of taxes that will apply if you fail to complete the rollover. After the plan administrator withholds this amount, the remaining proceeds are distributed to you. You take this money and deposit it yourself into a new retirement account.
  
  Contrast this method with a direct transfer. In a direct transfer, you never see the money. It moves directly from one plan fund to another. For this reason, your employer is not obligated to withhold taxes in a direct transfer.
  
  

Withholding

• Employer withholding serves as a type of insurance against your owing taxes on a distribution. So long as you roll the funds over to another qualified plan within 60 days, you will get your 20 percent back. If you fail to do this, not only will you not get your 20 percent back, if you are under age 59 1/2, this will count as an early distribution, and you will be charged an additional 10 percent penalty on any amounts not rolled over into a qualified plan.
  
  

Transfer Requirements

• Part of the disadvantage here is that you must replace 100 percent of your retirement account when rolling over money via an indirect rollover. Your employer withholds 20 percent. You get 80 percent to deposit into a new retirement account. So you must come up with the additional 20 percent withheld by your employer out of your own pocket. Depending on the size of your account, this may require you to have considerable upfront savings to make up the difference.
  
  

Tax Filing

• Your employer does not keep the money it withholds. Instead, this money is remitted to the IRS. So you will not apply to your employer for a refund of the withholding. Instead, you will receive any amounts owed you when you file your annual income tax return for the year in which you conducted the rollover.