When you roll over money from one retirement account to another, you generally have to make a decision. One option is doing a direct rollover, when your workplace plan administrator or financial institution holding your retirement account distributes the funds payable to the new plan or financial institution. This way, the money never ends up in your hands. The other type is an indirect rollover, when the distribution is made payable to you. That’s where the 60-day rollover rule comes in.
What is the 60-day rollover rule?
The 60-day rollover rule is the 60-day deadline you have for completing an indirect rollover from one retirement account—often a workplace plan, like a 401(k)—to another retirement account, such as another 401(k) or an individual retirement account (IRA). You must transfer funds sent to you from the old account into the new account within this time to avoid a tax bill and an early withdrawal penalty.
How does the 60-day rollover rule work?
The 60-day rollover rule countdown starts the day after you receive the payment. Or if the old retirement plan sends you a check, the clock starts ticking the day after the check arrives—not the day after it was mailed out. It’s up to you to deposit the full amount into another qualified retirement account by the 60-day deadline or else possibly face additional taxes (including the amount withheld as taxes) and penalties.
What happens if you deposit the funds after 60 days?
Once the 60 days are up, those funds would be treated as a taxable withdrawal—not a rollover (for traditional rollovers). If you’re younger than age 59½, you can also expect a 10% early withdrawal penalty in many cases.
There are limited situations when the IRS may waive the 60-day requirement and still allow you to transfer the funds after the deadline has passed. To see if an exception applies to your situation, make sure to consult a tax professional or refer the IRS’ full list of exceptions.
When to consider a rollover subject to the 60-day rollover rule
Indirect rollovers can be risky, but there are a couple scenarios when you may need one:
- Your new plan does not allow direct rollovers. In some cases, a retirement plan administrator may not allow direct rollovers from another plan. If you still want to move the funds and the receiving account allows rollovers, you will need to complete an indirect rollover. This requires you to receive the funds first and then deposit the money into an eligible retirement account yourself. Just know the IRS only allows one IRA-to-IRA indirect rollover within a 12-month period.
- You haven’t opened a new account yet. If you aren’t sure which retirement plan provider to use and are forced to close your former account right away (which could happen if you’re leaving a job), an indirect rollover would give you another 60 days to decide where to open a new retirement account.
The 60-day rollover rule tax implications
The tax implications of a 60-day rollover depend on the transaction details.
Whether or not you complete the rollover in time: Taxes may be withheld from the taxable amount you receive. Workplace plans, like traditional 401(k)s, are required to withhold 20%. With IRAs, you set the withholding amount, which is usually 10%. You can also elect to have no withholding.
If an amount is withheld, you’d need to cover the difference when you deposit funds into your new retirement account. For example, if you roll over $100,000 from a 401(k) and your plan withholds 20%, you’d only receive $80,000. But you’d still need to fund your new account with $100,000 to complete the rollover. Otherwise, $20,000 would be considered a withdrawal. Come tax-filing time, you’d receive a 1099-R from your old plan showing how much tax was withheld. Report the amount rolled over ($100,000) on your 1040 income tax return. Then, depending on your overall tax liability, you may receive a refund for most of what was withheld.
If you don’t complete the rollover within 60 days: You will owe income tax on the taxable portion for traditional IRAs and 401(k)s, plus a 10% early withdrawal penalty. Roth accounts allow tax-free withdrawals when the distribution is qualified. If a Roth distribution is non-qualified, the earnings portion may be subject to income tax, and if you’re under age 59½, an early withdrawal penalty may also apply.
60-day rollover rule exemptions
If you don’t complete the transfer in time, it might be possible to qualify for a waiver to the 60-day rollover rule.
Qualifying for an automatic waiver
If you followed all the required steps for the rollover, but the financial institution made a mistake—say, depositing the money into a brokerage account instead of an IRA—you should qualify for an automatic waiver. Your financial institution should work with you to fix the mistake, and you have a year from the beginning of your original 60-day window to move the funds into a retirement plan.
Using the self-certification procedure
If you missed the 60-day window for a different reason, the IRS might still grant you an exemption if:
- The distribution was sent as a check that was lost and never cashed.
- You mistakenly thought the money was transferred to an eligible retirement plan.
- There was a postal error when sending or receiving the money.
- Someone in your family died or was seriously ill.
- Your home was severely damaged.
- You were incarcerated.
You’d need to submit a written self-certification to your new retirement plan provider explaining what happened. The IRS could audit you later to verify your self-certification statements, so keep good records if you go this route.
Applying for a waiver
If you’re ineligible for self-certification, you could try applying for a waiver directly from the IRS using something called a private letter ruling (PLR). This is expensive, though: You’d need to pay $10,000 to file the letter and have the IRS hear your case with no guarantee of getting approved. On the other hand, the cost could be worth it to potentially avoid larger taxes and penalties on a retirement plan withdrawal you wanted to roll over. If you’re considering applying for a waiver, it’s a good idea to speak to a tax professional to understand your options.
Are there types of withdrawals the 60-day rollover rule doesn’t apply to?
The 60-day rollover rule only applies to eligible rollover distributions. Examples that are not eligible for rollover include:
- 401(k) hardship withdrawals, which are early distributions from a 401(k) due to immediate and heavy financial strain. Whether from medical bills or a death in the family, you’d still owe taxes on any taxable withdrawal from a non-Roth account, which your employer must approve. These withdrawals are not eligible for rollover.
- 401(k) loans, which some workplace plans allow. You could borrow up to 50% of your vested balance or $50,000, whichever is less. You’d need to repay the money, plus interest, within 5 years of taking a general purpose loan. Because a loan is not considered a distribution, it is not eligible for rollover.
- Required minimum distributions, which typically mandate you take money out of tax-deferred retirement plans once you turn age 73. You may be eligible to postpone RMDs from your current workplace retirement plan until after your retirement date, unless you own 5% or more of the business. But you generally can’t use a rollover to delay or avoid RMDs.
Alternatives to an indirect rollover
Given the risks of an indirect rollover, you might want to consider these alternatives:
- Direct rollovers, which remove you as the intermediary, moving your retirement funds directly from one financial institution to another. Because the money never ends up in your hands, you don’t have to worry about the 60-day rule.
- Leaving the money in your old account. If your old 401(k) plan allows, you may be able to keep your funds where they are. You couldn’t add additional funds and you probably couldn’t take out a 401(k) loan, but you could continue managing the existing investments. This could give you time to figure out your next move, without the pressure of the 60-day rule. Just know if you have a balance under $7,000, it could be sent to you as a taxable distribution, rolled over to an IRA, or, if your account is eligible for Auto Portability, automatically rolled to your new 401(k). Rollovers performed by Auto Portability are not subjected to taxes and penalties, though there may be a small fee incurred.