Fidelity says your 401(k) rollover check may come up short

Leaving a job and requesting a full 401(k) rollover can lead to a big surprise. By the time the distribution check arrives weeks later, its value may be 20% lower than the balance reflected on the final account statement.

Under federal tax rules, plan administrators are generally required to withhold 20% of an eligible rollover distribution for income taxes.

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.

The plan sends 20% of the balance directly to the IRS, reducing the check before a worker sees it.

Fidelity Investments has warned that choosing the wrong rollover method is one of the most frequent and expensive errors workers make during job transitions.

How Internal Revenue Code Section 3405(c) reduces your 401(k) rollover check

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.

Under Internal Revenue Code Section 3405(c), the former employer must withhold 20% of the total distribution for federal income taxes before mailing the check.

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.

The 60-day deadline that turns a temporary gap into a permanent tax hit

Once that reduced check arrives, there are exactly 60 calendar days to deposit the full $100,000 into a qualifying individual retirement account, with the $20,000 difference coming from personal savings, Fidelity stated.

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.

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In the meantime, $20,000 in liquid cash is needed, which many workers simply do not have available during a job transition.

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 59½, Fidelity noted.

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How Fidelity’s direct rollover method keeps the full balance intact

A direct rollover routes retirement savings from the old plan straight to the new IRA custodian, Fidelity reported.

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.

Sham Ganglani, Director of retirement product management at Fidelity Investments, said the payable-to instruction is the single detail that trips workers up most often.

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,

The direct rollover also removes the 60-day redeposit deadline, the IRS Publication 590-A confirmed.

Vanguard data reveals a second rollover risk that could cost $130,000 in retirement wealth

Even after completing a rollover, many workers leave the transferred balance sitting uninvested in a default money market fund for years.

Vanguard tracked rollovers initiated in 2015 and found that 28% of those balances remained parked entirely in cash seven years later, the firm reported.

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.

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.

Andy Reed, Head of Behavioral Economics Research at Vanguard, described the pattern in a September 2024 survey as a symptom of low awareness, with most affected investors unaware their money was in cash.

Two-thirds of the rollover investors who remained in cash did not know how their IRA assets were allocated, according to the survey.

How to complete a direct rollover, and what to do if you already took a check

The standard process begins by contacting the new IRA custodian and opening the receiving account.

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.

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.

Confirming the investment allocation the same week the money lands is the step Vanguard’s data suggests most rollover investors skip

Related: One 401(k) rollover to an IRA is irreversible for retirees

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This story was originally published September 9, 2026 at 6:17 AM.