The layoff is done. The paperwork is starting to arrive. And somewhere in that pile is a letter from your old 401(k) administrator asking what you want to do with the money. You have options — and one of them, done wrong, can cost you a surprise tax bill and a 10% penalty in the same week.
The rollover itself isn’t hard. It’s mostly one phone call and one form. The part people get wrong is the difference between a direct rollover and an indirect one. Get that right and you keep every dollar. Get it wrong and the IRS gets a cut before you even see the check.
Direct rollover: the clean version
In a direct rollover, the money moves straight from your old 401(k) provider to your new retirement account — usually an IRA at a brokerage, or a 401(k) at your next employer if and when you have one. You never touch the funds. No taxes withheld. No 60-day clock. Nothing to report on your return beyond a simple Form 1099-R marked as a rollover.
This is what you want. Almost always. When you call your 401(k) administrator, the magic phrase is "direct rollover" or "trustee-to-trustee transfer." Ask them to send the funds either electronically or as a check made payable to your new provider, not to you personally.
Indirect rollover: the one with the trap
In an indirect rollover, your old plan sends the check to you. That sounds simpler until you notice that by law they have to withhold 20% for federal taxes before it ever hits your hands. You then have 60 days to deposit the full original amount — yes, including the 20% they kept — into a new retirement account, or the IRS treats the missing portion as an early withdrawal. Cue the penalty and the income tax.
People miss this constantly. They get a check for $40,000, assume that’s the whole balance, roll over the $40,000, and find out months later that the original balance was $50,000, the $10,000 was withheld, and they owe taxes and a 10% penalty on that $10,000. Avoidable. Painful.
A few small rules that trip people up
- If your old 401(k) balance is under $7,000, your former employer may be able to cash it out or roll it to an IRA automatically — act before they decide for you
- Roth 401(k) dollars roll to a Roth IRA; traditional 401(k) dollars roll to a traditional IRA — mixing them creates a taxable event
- Loans against your old 401(k) typically come due within a short window after you leave — check your plan document for the exact deadline
- Company stock inside your 401(k) has a separate tax rule (net unrealized appreciation) that’s worth asking a CPA about before you roll
The order of operations
Open the new IRA first — a simple traditional or Roth IRA at any major brokerage takes about fifteen minutes online. Then call your old 401(k) administrator, request a direct rollover to that new IRA, and give them the account number. They’ll mail the check (payable to the new provider) or send it electronically. Confirm it arrived, then confirm the new provider invested it the way you wanted. Done.
The Rollover Decision Worksheet in Lumeway’s Job Loss bundle walks you through each step with a place to record account numbers, confirmation dates, and the exact phrasing to use on the call. It’s one of those small tools that takes a stressful phone call and turns it into a checklist.
Working through a layoff? Lumeway’s Job Loss bundle includes the rollover worksheet, severance response letter, COBRA election checklist, and budget reset worksheet — all editable in Google Docs or Word.
One phone call, one form, the right two words. That’s the whole move.
This post is for general informational purposes only and does not constitute legal, financial, or tax advice. Rollover rules, withholding requirements, and plan-specific deadlines vary. Consult a licensed financial advisor or CPA for guidance specific to your situation.