A direct rollover is when you roll over from a qualified retirement plan and your plan administrator makes the rollover check payable to your IRA custodian, in which case it may be mailed either to you or to your custodian. By choosing a direct rollover, you can avoid the normal 20% federal withholding requirement for taxes.
An indirect rollover is when your plan administrator makes the rollover check payable to you for deposit into your own personal account. With an indirect rollover, it is then up to you to redeposit the funds into the new IRA within the allowed 60-day period to avoid penalties. Also, an indirect rollover requires that your plan administrator withhold 20% for federal withholding taxes — and you must rollover the additional 20% out of pocket. If you do not make up the difference in the withheld amount, the IRS will consider it a distribution and tax it as income. The amount may also be subject to an additional premature penalty tax if you are under the age 59½.
Learn more about rollovers at Fund My Account.