If you are to receive assets from a qualified employer-sponsored plan, you may continue to defer income taxes by executing what is known as a direct rollover to an IRA.
In general, distributions paid to an employee are subject to a mandatory federal withholding of 20% if the distribution exceeds $200 for the year and is an eligible rollover distribution. Distributions that are not eligible rollover distributions are not subject to the mandatory 20% withholding.
Eligible rollover distributions are distributions of all or any part of an employee’s balance in a qualified employer-sponsored plan, except if the distribution is any of the following
An employee may avoid the 20% withholding by having the distribution processed as a direct rollover to an eligible IRA. In a direct rollover the assets are made payable to the financial institution (for the benefit of the IRA account owner). Once in the IRA, the assets (along with earnings and growth) continue to be sheltered from recognition as ordinary (taxable) income until they are distributed.