The IRS allows tax- and penalty-free rollovers from one tax-advantaged retirement plan or account to another, but only if you follow the 60-day rollover rule. The rule requires you to deposit all your funds into a new individual retirement account (IRA), 401(k), or other qualified retirement account within 60 days of the distribution.
If you fail to meet the 60-day deadline, your retirement funds will be subject to income taxes. And, if you're under 59½, an early withdrawal penalty will also be levied.
Key Takeaways
- The 60-day rollover rule says you must reinvest money from one retirement account into another within 60 days to avoid taxes and penalties.
- With a direct rollover, funds are moved straight from one retirement account to another, custodian to custodian, without you ever taking possession.
- With an indirect rollover, you take funds from one retirement account (usually in the form of a check) and reinvest the money into another retirement account—or back into the same one.
- The 60-day rollover rule primarily comes into play with indirect rollovers.
- Some investors use the 60-day rollover to access their retirement money if needed for a short time.
Direct vs. Indirect Rollovers
Most rollovers happen electronically with a direct rollover. For example, say you’ve left your job and want to roll over your 401(k) account into a traditional IRA.You can have your 401(k) plan administrator directly roll over the 401(k) money to the IRA you designate. You avoid taxes with this option.
With other direct rollovers, you receive a check made out in the name of the new 401(k) or the IRA account. You forward it to your new employer’s 401(k) plan administrator or the financial institution that has custody of your IRA. For most people, that option just adds a step, though it’s sometimes necessary if the plan administrator of your original plan can’t do a direct rollover. When you receive a check for a new account, taxes have not already been withheld.
With an indirect rollover, you take control of the funds and roll over the money to a retirement account yourself. You can make an indirect rollover with all or some of the money in your account. The plan administrator or account custodian liquidates the assets. They either mail a check made out to you or deposit the funds directly into your personal bank/brokerage account.
A transfer is when you move money from one retirement account type to a similar account type. A rollover is when you move money from one account to another, typically at another financial firm. Often, the destination account is a different type than the origin account.
How the 60-Day Rollover Rule Works
The 60-day rollover rule primarily applies to indirect rollovers, which the IRS refers to as 60-day rollovers. You have 60 days from receiving an IRA or retirement plan distribution to roll it over or transfer it to another plan or IRA.
If you don’t roll over your funds, you may have to pay a 10% early withdrawal penalty and income taxes on the withdrawal amount if you are under 59½.If the rollover is from a Roth IRA, you can withdraw contributions at any time free of tax and penalty. But earnings withdrawn from a Roth IRA are subject to the 60-day rule.
Many financial and tax advisors recommend direct rollovers because delays and mistakes are less likely. If the money goes straight to an account or if a check is made out to the account (not you), you have deniability in cllaiming you never took a taxable distribution should the funds not be deposited before the deadline.
Note
Even with direct rollovers, you should aim to get the funds transferred within the 60-day window.
Using the 60-Day Rule
Why would you do an indirect rollover, given that it has a 60-day deadline? The answer may be that you need to use your funds during that time. The IRS rules say you have 60 days to deposit to another 401(k) or IRA—or to redeposit the money to the same account. This latter provision basically gives you the option to use money from your account and then repay it within this time frame.
This strategy primarily applies to IRAs, as many—though not all—401(k) plans often allow you to borrow funds, paying yourself back over time with interest. Either way, the 60-day rollover rule can be a convenient way to access money from a retirement account on a short-term basis.
Taking temporary control of your retirement funds is simple enough. Have the administrator or custodian cut you a check. Then, do with it what you wish. As long as you redeposit the money within 60 days of receiving it, it will be treated like an indirect rollover.
Just remember: You can treat the money as a loan, but technically it is not a loan. There is no IRS rule governing an IRA “loan.
How Indirect Rollovers Are Taxed
When your 401(k) plan administrator or your IRA custodian writes you a check, by law, they must automatically withhold a certain amount in taxes, usually 20% of the total. So you would get less than the amount that you were withdrawing.
You will need to make up the amount withheld—the funds you didn’t actually get—when you redeposit the money if you want to avoid paying taxes.
For example, if you take a $10,000 distribution from your IRA, your custodian will withhold taxes—say, $2,000. If you deposit an $8,000 check within 60 days back into the IRA, you’ll owe taxes on the $2,000 withheld. If you make up the $2,000 from other sources of income and redeposit the entire $10,000, you won’t owe taxes.
There are three tax-reporting scenarios for indirect rollovers. Continuing with the example of taking a $10,000 distribution that is taxed $2,000:
- If you redeposit the entire amount you took out, including making up the $2,000 in taxes withheld, and you meet the 60-day limit, you can report the rollover as a nontaxable rollover.
- If you redeposit the $8,000 you took out, but not the $2,000 taxes withheld, you must report the $2,000 as taxable income, the $8,000 as a nontaxable rollover, and the $2,000 as taxes paid, plus the 10% penalty.
- If you fail to redeposit any of the money within 60 days, you should report the entire $10,000 as taxable income and $2,000 as taxes paid. If you’re under 59½, you’ll also report and pay the additional 10% penalty unless you qualify for an exception.
What Is the 60-Day Rollover Rule?
The 60-day rollover rule permits tax- and penalty-free rollovers from one retirement account to another if the full amount is deposited within 60 days of being withdrawn. Failure to meet the 60-day deadline means the funds will be treated as a withdrawal. They are then subject to income tax and potential early withdrawal penalties.
How Does the 60-Day Rollover Rule Work?
The 60-day rollover rule requires that you deposit all the funds from a retirement account into another IRA, 401(k), or another qualified retirement account within 60 days. If you don’t follow the 60-day rule, the funds withdrawn will be subject to taxes and an early withdrawal penalty if you are younger than 59½. Understanding how the 60-day rollover rule works is crucial, particularly regarding indirect rollovers.
What Is an Indirect Rollover?
An indirect rollover occurs when funds from one retirement account are paid directly to the account holder, who then reinvests the money into another retirement account—or back into the same one. This differs from a direct rollover, where the money is transferred directly from one retirement account to another.
The Bottom Line
Using a rollover to move money from one tax-advantaged retirement account to another can be tricky with an indirect rollover. It's crucial to understand the 60-day rollover rule, which requires you to deposit all your funds into a new IRA, 401(k), or another qualified retirement account within 60 days. If you miss the deadline, the distribution will be subject to income tax and an early withdrawal penalty if you're under age 59½.
Also, remember that during any 12-month period, you’re allowed only one indirect IRA rollover. However, direct rollovers and trustee-to-trustee transfers between IRAs aren’t limited to one per 12 months, nor are rollovers from traditional to Roth IRAs.
Advisor Insight
Rebecca Dawson
President, Dawson Capital, Los Angeles, CA
If you withdraw funds from a traditional IRA, you have 60 days to return the funds, or you will be taxed. If you are under 59½,you will also pay a 10% penalty unless you qualify for an early withdrawal under these scenarios:
- After the IRA owner reaches 59½
- Death
- Total and permanent disability
- Qualified higher-education expenses
- First-time homebuyers up to $10,000
- Amount of unreimbursed medical expenses
- Health insurance premiums paid while unemployed
- Certain distributions to qualified military reservists called to duty
- In-plan Roth IRA rollovers or eligible distributions contributed to another retirement plan within 60 days
There's one additional option: A little-known section of the IRS tax code exempts you from an early withdrawal penalty before age 59½ if you withdraw money in the form of substantially equal periodic payments (SEPP). The IRS says that once you begin SEPPs, you must continue them for at least five years or until you reach age 59 ½, whichever occurs later.
Retirement Security Rule: What It Is and What It Means for Investors
If you own an IRA, you are planning for your financial future. Now or in retirement, you might seek investment guidance from a financial advisor. If that occurs, you should know about the Retirement Security Rule. Also known as the fiduciary rule, the new regulation’s purpose is to protect investors from conflicts of interest when receiving investment advice that the investor uses for retirement savings.
The rule was issued by the U.S. Department of Labor (DOL) on April 23, 2024. It takes effect on September 23, 2024. However, a one-year transition period will delay the effective date of certain conditions to 2025.
If an advisor is acting as a fiduciary under the Employee Retirement Income Security Act (ERISA), they are subject to the higher standard–the fiduciary best-advice standard rather than the lower, merely suitable advice standard. Their designation can limit products and services they are allowed to sell to clients who are saving for retirement.
