What Is the 60-Day Rollover Rule for IRAs and Roths?
David K. MacLeod, CFP®, CFA
Oh no. Something terrible has happened. Imagine your IRA rollover check has been deposited mistakenly into your checking account. Your IRA custodian made a big mistake. “What are my options for correcting a botched IRA rollover?”
Hopefully, you’ve never had to ask this question. And we hope you never have to. But if you do ever face complications with moving IRA funds, it’s helpful to know about the 60-day rollover rule.
Funds move between IRA accounts in one of two ways:
Rollover—an indirect transfer whereby an IRA owner receives a check personally for the transfer amount and re-deposits the funds into another IRA (or back into the same IRA). You have only 60 days to re-deposit before it becomes a permanent distribution.
Trustee-to-trustee transfer—a direct transfer between IRAs whereby the owner does not personally receive the money.
Since trustee-to-trustee transfers are not limited and a lot less risky, they are the preferred way to move money between retirement accounts.
Rollover Rules to Know
The IRS allows individuals to roll over funds from one IRA to another IRA (or back into the same one) once every 12 months. Here are some key points about the 60-day rollover rule:
Only one rollover per one-year period is permitted, effective January 1, 2015. This limit applies across all IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs. For example, if you own an IRA and Roth IRA and complete a rollover within your Roth IRA, you must wait until the one-year period has passed before you can do another rollover, whether in the IRA or Roth IRA.
The rule applies to partial and total account rollovers.
Funds withdrawn from an IRA can be re-deposited as a rollover.
60-day rollovers are not allowed for inherited IRA accounts.
Trustee-to-trustee transfers are unlimited. Do a transfer instead of a 60-day rollover if possible.
The sanctions for a botched rollover can be steep. They may be worse than you think: You’ll pay taxes and maybe penalties too. Some of the costs and penalties could include:
Federal income tax (assume at your highest marginal income tax rate, up to 37%)
Federal tax penalty (10%), if under age 59 ½
State income tax (assume at your highest marginal income tax rate, up to 13.3% in California)
State tax penalty (2.5% in California), if under age 59 1/2
Loss of income tax deferral feature in IRA
Adding all of these up, an early IRA distribution could cost you up to 62.8% as a California resident. On a $400,000 IRA account, that could mean a loss of over $250,000. Ouch!
As if that weren’t bad enough, an IRA owner who makes an ineligible second 60-day rollover within the 12 months will face an excess contribution penalty of 6% per each year the funds remain in the IRA.
Exercise Due Caution
We don’t mean to scare you. But we hope that you’ll exercise due caution when moving money between IRAs. Do a trustee-to-trustee transfer whenever possible. If you do intend to make an IRA rollover, make sure you’re doing it within the rules. Unfortunately, the IRS is not known for extending grace in this area.
If you have any questions about whether and how you should do a transfer or rollover, consider talking with a fee-only financial advisor, who can provide recommendations in light of your entire financial picture.
Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.