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The 60 day rule refers to the length of time an individual has to deposit money back into a retirement account that was previously withdrawn without incurring a taxable event.  There are a number of reasons someone would withdraw money from an account whether it be to pay a large tax bill, obtain cash for an unexpected expense, or to rollover the balance into another retirement account.

There are multiple ways to rollover a balance from one retirement account to another so we will begin by explaining the more common ways to rollover a balance where the 60 day rule won’t come into play.

Direct Rollover

 

A direct rollover is a transfer from a retirement plan to another retirement plan or IRA where the custodian of your current plan makes payment directly to your new account.  This can be in the form of a check made payable to the new account custodian or a direct wire transfer.  This method will avoid taxes and penalties because the account owner never had access to the cash during the transfer.

Trustee to Trustee Transfer

 

Similar to the direct rollover, a trustee to trustee transfer moves money from one IRA to another IRA without the account owner ever having access to the cash and therefore avoiding taxes and penalties.

The direct rollover and trustee to trustee transfer methods both avoid taxes and penalties as cash is never available to the owner and therefore the 60 day rule does not come into effect.  In any case where the account owner has access to the cash, the money will have to be redeposited into another retirement account within 60 days or the owner will be taxed on any pre-tax dollars and possibly penalized if the owner is under the age of 59 ½.

The 60 day rule is one of the only ways an owner has access to money in a retirement account without paying taxes or penalties on the distribution.  An individual can take advantage of this if they are in need of immediate cash for something like an unexpected expense.  The distribution is essentially an interest free loan from your retirement account for 60 days.  If the money is not available within the 60 days to redeposit, taxes and possible penalties will be assessed on the distribution.  One of our recommendations to clients is to obtain access to a home equity prior to taking the distribution.  If the cash is not available before the 60 days, use the home equity line which is typically at a low interest rate to replenish the retirement account and avoid taxes and penalties.

IRS: One 60 Day Rollover in 12 Month Rule

 

The IRS recognized that individuals were taking advantage of this rule by taking multiple distributions in a single year and therefore increasing the time period.  Beginning after January 1, 2015, the IRS changed the law to state that only one rollover can be made from one IRA to another IRA within a 12 month period.  This rule does not apply to the following:

  • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

It shows the one rollover in a 12 month period rule was meant to limit the abuse of the 60 day rule because direct rollovers and trustee to trustee transfers are excluded.

What can be Rolled Over?

 

Most of the time the entire balance in a retirement account can be rolled over to another account unless the balance includes an amount of money that is required to be withdrawn.  Examples include required minimum distributions and contributions in excess of limits (plus earnings on the excess contributions).  For retirement plans, in addition to RMD’s and excess contributions, any loans outstanding at the time of rollover or hardship distributions taken during the year will be subject to taxes and possible penalties.

Are Taxes Assessed at the Time of Distribution? 

 

Distribution from an IRA:  Typically, a tax is not assessed on a distribution from an IRA unless the account owner elects to have taxes withheld.  A distribution from a pre-tax IRA account is typically subject to a 10% early withdrawal penalty if taken before 59 ½.

Distribution from Retirement Plan:  Any distribution taken from a retirement plan where cash is made available to the owner is subject to a minimum 20% federal withholding.  For example, if you request a $10,000 distribution, you will receive $8,000 and $2,000 will go to the government.  There is no option to opt out of this withholding even if you intend to rollover the balance within 60 days.  For this reason, a direct rollover would be a way to avoid the 20% withholding.

It is important to understand if you intend to rollover a distribution from a retirement account that the entire amount of the distribution must be redeposited within 60 days to avoid taxes and penalties even if taxes were already withheld.  Using the previous example, if you take a $10,000 distribution from a retirement account and have the 20% withheld for taxes you must redeposit $10,000 within 60 days even though you only received $8,000 in cash.  This scenario may appear that you are losing $2,000 but when you complete your taxes the $10,000 distribution will not be taxable as long as the full amount was redeposited within 60 days.  When you file your taxes, the $2,000 will be included in the federal taxes withheld which is how the money is recouped.

How is the Rollover Reported to the Government?

 

Any time you wish to utilize the 60 day rule, it is important you keep documentation.  Any distribution from a retirement account will generate a 1099-R form that must be reported as income on your tax return.  Also, the 1099-R will show any taxes withheld from the distribution.  You will receive a 1099-R even if a direct rollover or trustee to trustee transfer was done.  The way the distribution is coded determines how the IRS treats it for tax purposes.  If the distribution is coded as a direct rollover or trustee to trustee transfer, the distribution will not be treated as taxable income.  If the distribution gave you access to cash, the 1099-R will be coded in a way that treats the distribution as a taxable event.  If you redeposited the amount into another retirement account within 60 days, it is important you notify your tax preparer and bring documentation showing the deposit was made timely.  The tax preparer should then treat the distribution as a non-taxable event.

 

Rob Mangold

About Rob………

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.

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Investment advisory services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS. APFS is not affiliated with any other named business entity. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.