The 60-Day Rollover Rule for Retirement Plans

The 60-day rollover rule allows individuals to move money from one retirement account to another without triggering taxes, as long as the funds are deposited into a new qualified account within 60 days. Missing the 60-day deadline can lead to taxes and potential penalties, so understanding the timeline is key. The 60-day rollover rules apply to IRAs and most employer-sponsored retirement plans, but specific requirements and exceptions can affect how the rule works in practice.

A financial advisor can help you execute retirement account rollovers and decide how to invest your savings. Find an advisor today.

Retirement Account Rollovers Explained

To understand the 60-day rollover rule, it’s important to understand how IRA and 401(k) plan rollovers work in general. There are two types of retirement plan rollovers: direct and indirect.

Direct Rollover

With a direct rollover, funds are moved straight from your original retirement account provider to your new retirement account without you taking possession of the money. You don’t receive any money yourself; everything is done electronically and you have just to fill out the appropriate paperwork. When you’re moving money between IRAs, this can be referred to as a trustee-to-trustee transfer.

The advantage of a direct rollover is that you can avoid potential tax penalties. Since the funds are being sent directly from Account A to Account B, it’s not considered a distribution. So you wouldn’t owe any income tax on the money or any early withdrawal penalties if you’re under age 59 ½.

Indirect Rollover

An indirect rollover, on the other hand, works differently. In this scenario, you ask the company that holds your first retirement account to cut you a check for the money you want to distribute. It’s then left up to you to deposit that money into your new retirement account.

It sounds simple enough, but if you don’t deposit the money within 60 days, the entire amount can be treated as a taxable distribution. Not only that, but you may also have to pay a 10% early withdrawal penalty if you’re under age 59 ½. That’s because of the IRS 60-day rollover rule.

60-Day Rollover Rules Explained

"Rollover IRA" written on a piece of paper

When moving funds between retirement accounts, the IRS allows a 60-day window to complete an indirect rollover. During this time, the account holder can withdraw funds and deposit them into another eligible retirement account without facing taxes or penalties. If the deadline passes before the funds are redeposited, the IRS treats the withdrawal as a taxable distribution, and additional penalties may apply if the account holder is under age 59 ½.

Limits on IRA Rollovers

The 60-day rollover rules limit account holders to one IRA-to-IRA rollover per 12-month period, regardless of the number or type of IRAs owned. For example, completing a rollover from a traditional IRA in January means another IRA-to-IRA rollover cannot be completed from any of your IRAs until the following January. Attempting multiple rollovers within this period could result in taxes, early withdrawal penalties and the potential loss of IRA status for the affected funds.

Transfers and Conversions Excluded

Some transactions are not affected by the once-per-year rollover limit. Direct trustee-to-trustee transfers, where funds move directly between financial institutions, do not count toward the limit. Similarly, converting a traditional IRA to a Roth IRA is not subject to the one-rollover-per-year restriction, allowing more flexibility for those making Roth conversions.

Exceptions and IRS Waivers

The IRS recognizes that unexpected events can disrupt the rollover process. In cases such as financial institution errors, severe illness, or other circumstances beyond your control, the IRS may grant a waiver for the 60-day deadline. Waivers may be obtained automatically, by securing a private letter ruling or by self-certifying that the situation meets IRS criteria, subject to later IRS review.

Using the 60-Day Rollover Rule for a Short-Term Loan

Technically, it’s possible to withdraw money from an IRA through an indirect rollover and use it as a short-term loan. The advantage of doing so is that you’re using your own money so there’s no interest to pay to a lender. And there’s no credit check involved either, which can make those funds easier to access if you need cash in a hurry. As long as you pay the money back within the 60-day rollover window you won’t get stuck with tax penalties.

But there are some conditions to keep in mind. First, your IRA custodian can withhold 20% of the money you want to distribute for taxes. So if you want to take $20,000 from your IRA, $4,000 of it would be withheld for taxes. You’d have two options:

Roll over the $16,000 and report it as nontaxable, while reporting $4,000 as taxable income and $4,000 as taxes paid
Roll over the full $20,000, reporting $16,000 as a nontaxable rollover and $4,000 as taxes paid

With the first option, you could end up having to pay the 10% early withdrawal penalty if you’re under age 59 ½. With the second option, you can avoid paying taxes and penalties but only if you make up the amount withheld in taxes.

So again, say you want to withdraw $20,000 but your IRA custodian withholds $4,000 for taxes. To avoid taxes of any kind, you’d have to redeposit the entire $20,000, making up the $4,000 that was withheld with other funds. And again, you’d have to do all of this within the 60-day rollover time frame. Otherwise, the entire amount is treated as a taxable distribution.

60-Day Rollover Alternatives

While the 60-day rollover rule can offer some flexibility in accessing your retirement funds, consider the potential tax consequences involved if you can’t redeposit the money on time. A direct rollover is the simplest and most convenient alternative to a 60-day rollover.

However, if you need the money for a short-term expense, taking a loan from your 401(k) may be something to consider, especially if you need a larger amount of money and more time to pay it back. You may pay interest on a 401(k) loan but again, you’re paying the money back to yourself.

That strategy has its own downsides, however. If you leave your employer then the entire loan amount may become payable immediately. And if you don’t pay up, the full loan amount can be reported to the IRS as a taxable distribution.

Personal loans, home equity loans or even credit cards may be worth considering in lieu of tapping into retirement savings when you need money on short notice. You’re creating debt but you’re not running the risk of negative tax consequences and more importantly, you’re not draining your retirement accounts.

Consequences for Breaking the 60-Day Rollover Rule

If you don’t follow the 60-day rule then it could cost you a lot of money and you could end up losing some benefits of your retirement account altogether. Here are some of the consequences that you could face:

Lose tax benefits: If your money isn’t in a retirement account on time then you could end up losing all the tax benefits you were counting on. In fact, you could permanently lose the right to put those funds into a retirement account without it counting as new income.
Pay penalties: You could be subject to an early withdrawal penalty if you are younger than 59 ½ years of age.
Pay taxes: Your pre-tax income from the retirement account could be considered normal income for the year if you don’t roll it over on time.
Opportunity cost: You could lose any potential return during and after those 60 days if you aren’t actively investing the money into a retirement account.

Bottom Line

The IRS 60-day rule for retirement account rollovers can give you some leeway when taking an indirect rollover from a retirement account. But it’s important to understand how the rule works and avoid mistakes and also why timing matters if you’re considering using a short-term rollover for a loan. The IRS does permit exceptions in certain situations if you missed the deadline because of circumstances beyond your control. Just be sure to pursue such exceptions as the IRS mandates.

Tips for Retirement Planning

Consider talking to a financial advisor about the pros and cons of 60-day rollovers and whether it’s a strategy you should use if you need money in the near term. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.