The IRS Just Eased 401(k)-to-IRA Rollovers — But One Missed Step Still Costs You 20% Upfront

A direct 401(k)-to-IRA rollover generally avoids the mandatory 20% federal withholding that applies when an eligible taxable distribution goes directly to the participant – Shutterstock

The IRS just moved to make 401(k)-to-IRA rollovers easier to handle, but the old 20% withholding rule still matters. A new IRS notice gives retirement plans sample forms and proposed procedures for direct rollovers, aiming to make the process more standardized and less confusing.

That change does not eliminate the biggest trap in the process. If a taxable 401(k) distribution comes directly to you instead of going straight to the IRA, the plan generally must withhold 20% for federal taxes.