A direct rollover moves money from plan to plan or plan to IRA without passing through your hands. An indirect rollover sends you a check, the plan withholds 20% for taxes, and you have 60 days to deposit the full amount, including the withheld portion, to avoid tax. Direct is almost always cleaner.
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We compare the plan's fund expenses and administrative fees with an IRA alternative, and check whether the plan offers anything an IRA cannot, such as a stable value fund or penalty-free withdrawals from age 55 if you separate from service that year or later.
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If your 401(k) holds appreciated company stock, a special rule called net unrealized appreciation may let you pay long-term capital gains rates on the growth instead of ordinary income tax. It must be decided before any rollover.
Roth 401(k) money can roll to a Roth IRA. Your Roth IRA's own five-year clock matters for tax-free earnings, so the account history is checked first.
At retirement, the rollover decision is part of your income plan: which account funds which years, how withdrawals affect taxes, and how required minimum distributions will work.
