For a worker with $100,000 in retirement savings, that means receiving an $80,000 check, while $20,000 goes directly to the Internal Revenue Service<\/a>. <\/p>\n The plan sends 20% of the balance directly to the IRS, reducing the check before a worker sees it. <\/p>\n Fidelity Investments has warned<\/a> that choosing the wrong rollover method is one of the most frequent and expensive errors workers make during job transitions. <\/p>\n How Internal Revenue Code Section 3405(c) reduces your 401(k) rollover check <\/p>\n Federal law offers two paths for moving retirement savings out of a former employer’s plan, and the path chosen determines the immediate tax exposure. In an indirect rollover, the plan sends the money as a personal check. <\/p>\n Under Internal Revenue Code Section 3405(c)<\/a>, the former employer must withhold 20% of the total distribution for federal income taxes before mailing the check. <\/p>\n That withholding is mandatory; the plan administrator has no legal authority to waive it, and stating an intent to complete a full rollover within 60 days does not eliminate the obligation, as confirmed by IRS Publication 575<\/a>. <\/p>\n The 60-day deadline that turns a temporary gap into a permanent tax hit <\/p>\n Once that reduced check arrives, there are exactly 60 calendar days to deposit the full $100,000 into a qualifying individual retirement account<\/a>, with the $20,000 difference coming from personal savings, Fidelity stated<\/a>. <\/p>\n The withheld 20% is eventually recovered as a credit when filing the annual return, but the refund may not be received for up to 12 months. <\/p>\n More Fidelity: <\/p>\n In the meantime, $20,000 in liquid cash is needed, which many workers simply do not have available during a job transition. <\/p>\n Failing to cover the shortfall makes the unreplaced portion taxable ordinary income for the year the distribution was issued, plus a 10% early withdrawal penalty for account holders under 59\u00bd, Fidelity noted. <\/p>\n A direct rollover routes retirement savings<\/a> from the old plan straight to the new IRA custodian, Fidelity reported<\/a>. <\/p>\n Story Continues <\/p>\n Because the money never touches a personal bank account, the 20% mandatory withholding does not apply, and every dollar arrives in the new account, according to the IRS<\/a>. <\/p>\n Sham Ganglani<\/a>, Director of retirement product management at Fidelity Investments, said the payable-to instruction is the single detail that trips workers up most often. <\/p>\n Have the check made payable to the new plan provider receiving the money with FBO and your name and have it sent directly to them, <\/p>\n The direct rollover also removes the 60-day redeposit deadline, the IRS Publication 590-A confirmed. <\/p>\n Vanguard data reveals a second rollover risk that could cost $130,000 in retirement wealth <\/p>\n Even after completing a rollover, many workers leave the transferred balance sitting uninvested in a default money market fund for years. <\/p>\n Vanguard tracked<\/a> rollovers initiated in 2015 and found that 28% of those balances remained parked entirely in cash seven years later, the firm reported. <\/p>\n For investors under age 55, moving rollover assets into a target-date fund is estimated to produce $130,000 or more in additional retirement wealth at age 65, according to Vanguard’s July 2024 research<\/a>. <\/p>\n Rollover cash that stays uninvested through a worker’s 30s and 40s represents decades of lost compounding, Scott Boyd, a benefits and planning consultant in Executive Services at Fidelity, warned<\/a>. <\/p>\n Andy Reed, Head of Behavioral Economics Research at Vanguard, described the pattern in a September 2024 survey<\/a> as a symptom of low awareness, with most affected investors unaware their money was in cash. <\/p>\n Two-thirds of the rollover investors who remained in cash did not know how their IRA assets were allocated, according to the survey. <\/p>\n How to complete a direct rollover, and what to do if you already took a check <\/p>\n The standard process begins by contacting the new IRA custodian and opening the receiving account. <\/p>\n Workers can then request a direct trustee-to-trustee rollover, with the check payable to the new provider for the benefit of the account holder, Fidelity showed<\/a>. <\/p>\n Account holders already holding an indirect distribution check have 60 days to redeposit the full pre-withholding balance into the new account. The 20% shortfall is covered by personal savings and reclaimed as a credit when filing taxes, the IRS confirmed<\/a>.\u00a0 <\/p>\n Confirming the investment allocation the same week the money lands is the step Vanguard’s data suggests most rollover investors skip <\/p>\n Related: One 401(k) rollover to an IRA is irreversible for retirees<\/a> <\/p>\n This story was originally published by TheStreet<\/a> on Sep 9, 2026, where it first appeared in the Retirement<\/a> section. Add TheStreet as a Preferred Source by clicking here.<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"Leaving a job and requesting a full 401(k) rollover can lead to a big surprise. By the time…\n","protected":false},"author":2,"featured_media":611332,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[78213,114,276835,276834,31817,268,85,276837,46,276836,266,267,276839,276838,6300],"class_list":["post-611331","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-account-holders","tag-business","tag-direct-rollover","tag-eligible-rollover-distribution","tag-fidelity-investments","tag-finance","tag-il","tag-internal-revenue-code","tag-israel","tag-personal-check","tag-personal-finance","tag-personalfinance","tag-plan-administrator","tag-plan-administrators","tag-retirement-savings"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/611331","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=611331"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/611331\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/611332"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=611331"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=611331"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=611331"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}<\/a> A 60-day rollover deadline can turn a temporary cash shortfall into taxable income and a 10% penalty for younger investors.Pramote Polyamate \/ Getty Images How Fidelity’s direct rollover method keeps the full balance intact <\/p>\n