- In most cases, a rollover happens when you direct your employer to move your money from a 401(k) to an IRA you have opened at a bank. That is called a direct rollover. When you have your broker switch directly from one IRA to another, it’s called a trustee-to-trustee transfer.
- You have as long as you want to do a direct rollover. In almost all cases (check with your employer), you can leave the money in a 401(k) indefinitely.
- In some cases, however, you might want to take temporary control of the money and do the rollover yourself. To avoid paying taxes and penalties, you must deposit all your retirement money into a new IRA or 401(k) within 60 days.
Introduction: The 60-Day Rollover Rule
Most IRA rollovers happen without anyone actually touching the money. Your 401(k) plan administrator will just directly transfer the 401(k) money to the IRA you designate. You can avoid taxes and hassle with this option.
You can also have a check made out to a 401(k) account or an IRA account that you physically deliver to your new employer or a bank. Taxes won’t be withheld. For most people, that option just adds complications.
There is another option, however. If you want to use some of the money you have saved for retirement temporarily, you can take advantage of the 60-day rollover role to give yourself a loan. But you have to follow the rules precisely and put the money back into a tax-deferred retirement plan—an IRA or 401(k)—within 60 days.
That’s called the 60-day rollover rule. A rollover in which you handle the money yourself is called an indirect rollover.
The important things to know about the 60-day rollover rule:
- How to Avoid Paying Taxes
- How to Report Under the 60-Day Rollover Rule
- How Often You Can Use the 60-Day Rollover Rule
How to Avoid Paying Taxes
Taking temporary control of your retirement money is simple enough. You direct your 401(k) plan administrator or the bank where you have an IRA to make out a check to you.
IRS rules say you have 60 days to re-deposit the money to the same account or another 401(k) or IRA. If you redeposit all of your retirement money by the time limit, you don’t owe taxes.
But there is a tax complication. When your 401(k) plan administrator or your bank makes out a check to you, taxes are withheld automatically. If you want to avoid paying taxes, you need to make up amount withheld when you redeposit the money.
An example: If you take a $10,000 distribution from your 401(k) plan, your plan administrator will withhold taxes—say, $2,000.
If you deposit the $8,000 check within 60 days in another or the same 401(k) or IRA, you will owe taxes on the $2,000 withheld. If you are under 59½, you will also owe an additional 10% penalty unless you qualify for an exception.
If you make up the $2,000 from other sources of income and redeposit $10,000, you won’t owe taxes.
How to Report Under the 60-Day Rollover Rule
There are three tax-reporting scenarios, continuing with the $10,000 rollover example above.
- If you redeposit the entire amount you took out, including making up the $2,000 in the 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 are under 59½, you will also report and pay the additional 10% penalty unless you qualify for an exception.
How Often You Can Use the 60-Day Rollover Rule
You can use the 60-Day Rollover Rule once a year.