The 60-Day Rollover Rule for Retirement Plans

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 another 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 apply.

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 can receive a check made out in the name of the new 401(k) or the IRA account, which you forward to your new employer’s 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 will not be withheld.

With an indirect rollover, you take control of the funds to 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.

How the 60-Day Rollover Rule Works

The 60-day rollover rule primarily applies to indirect rollovers, which the IRS actually 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.

Many financial and tax advisors recommend direct rollovers because delays and mistakes are less likely. If the money goes straight to an account or a check’s made out to the account (not you), you have deniability in saying you ever actually took a taxable distribution should the funds not be deposited promptly.

Using the 60-Day Rule

Why would you do an indirect rollover, given it has a 60-day deadline? Perhaps 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 it to the same account. This latter provision basically gives you the option to use money from your account and then repay it within this timeframe.

This strategy primarily works with 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 will. As long as you redeposit the money within 60 days of receiving it, it will be treated like an indirect rollover.

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 was in your account.

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:

1. 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.
2. 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.
3. 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.

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.