What Is a 60-Day Rollover?
The 60-day rollover rule applies to indirect rollovers of all or a portion of the assets in a qualified retirement account, such as an IRA or 401(k). Essentially, once you take a distribution from your account, you'll owe no interest or penalties if it is redeposited into a qualified retirement account within 60 days.
The 60-day rollover rule
In a nutshell, if you withdraw money from a tax-advantaged retirement account, such as a 401(k) or IRA, you have a 60-day window to redeposit it into a qualifying account, in order to avoid paying taxes and/or an early withdrawal penalty on the money.
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This is commonly known as an indirect rollover and occurs when you receive a check directly for the funds in your retirement account, as opposed to rolling the money over directly.
For example, let's say that you leave your job and have a 401(k) with that employer worth $25,000. You can request that a check for the full value of the account be sent to you, and you can redeposit it in a retirement account of your choice, such as a rollover IRA or your new employer's retirement plan. If you do so within 60 days, it is treated as a rollover, and you won't owe any taxes or penalties on the withdrawn funds.
On the other hand, if you don't redeposit the funds within 60 days, the disbursement of funds will be treated as a withdrawal by the IRS. If the funds you withdrew were tax-deferred (like most 401(k)s and traditional IRAs), the entire amount will be treated as taxable income. And if you're under 59 1/2 years old, you'll face an additional 10% early withdrawal penalty from the IRS, unless you qualify for an exception.
You can use this rule to borrow from your IRA
If your retirement savings are in a 401(k) or similar employer-sponsored retirement plan, you can typically borrow money from your account and then pay yourself back with interest over a pre-determined amount of time.
However, there is no such thing as an IRA loan, so if your retirement savings are in an IRA, you generally cannot borrow money from your account. In fact, the IRS is so strict about this that it says that if you borrow money from your IRA, it will cease to become an IRA and you'll lose all of the tax benefits of the account.
For IRA investors, the 60-day rollover rule can be a convenient way to borrow money from an IRA on a short-term basis, interest-free. As long as you redeposit the money within 60 days, it will be treated just like a rollover, even if the money is put back in the same account. For instance, if I need $1,000 to help pay for my child's college tuition this week and won't get a paycheck until the first day of next month, it's completely acceptable to withdraw the money from my IRA and then replace it once I get paid.
One big caveat: You are only allowed one IRA rollover in any 12-month period. So, you can't just continue to use this strategy month after month if you find yourself short on cash.
A word of caution, though, to only use this strategy if you're 100% certain you'll be able to redeposit the money within the 60-day window. If you take too long and it becomes a withdrawal of retirement savings, the taxes and penalty can take a big bite out of your savings.
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