Should you choose to make an indirect rollover rather than a direct rollover from an employer-sponsored retirement plan, your plan is required to withhold 20% of the taxable portion of your distribution (you may take a credit for the amount withheld when you file your federal tax return). You can still roll over the entire amount of your distribution, but you’ll need to make up the 20% that was withheld using other assets.

For example, if your taxable distribution from the plan is $10,000, the plan will withhold $2,000 and you’ll receive a check for $8,000. You can still roll $10,000 over to another employer plan or an IRA, but you’ll need to come up with that $2,000 from your other funds.

Similarly, if you elect to make a rollover from an IRA, you can avoid current taxation by either transferring the funds directly to another IRA or to an employer plan that accepts rollovers (sometimes called a “trustee-to-trustee transfer”), or by taking the distribution and making an indirect rollover within the 60-day time limit (20% withholding doesn’t apply to IRA rollovers).

Under recently revised IRS rules, you can make only one tax-free, indirect rollover from any IRA you own (traditional or Roth) to another IRA you own in any 12-month period. This limit does not apply to direct rollovers.

In addition, should you miss the 60-day time limit on any portion of the rollover amount when making an indirect rollover, you will be subject to income tax and potentially a 10% penalty on that amount. This is applicable to both employer-sponsored retirement plans and IRAs.

Because of the 20% withholding rule and the possibility of missing the 60-day deadline, in many cases you’re better off making a direct rollover to move your retirement plan funds from one account to another.