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How Does a 60-Day Rollover Rule Work for Retirement Plans?

60 day rollover rule
Published on
July 9, 2024

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What is the 60 day rollover rule? You should know about all the nuances of your retirement saving plan including rollover. After all, this rule can save you from a lot of hassles when switching retirement accounts. If you have an IRA, a 401k or any other account, knowing about the rollover rules can come in really handy. How so? Well, they can save you from tax penalties. But what are these rules and how to follow them? The good news is that they are not complex at all. All you need to do is understand them thoroughly. And we have you covered for the. Find out everything you need to know about the 60 day rollover rule.

Key Takeaways!

  • This 60 day rollover rule allows you to transfer retirement funds to a new account within 60 days without tax or penalty.
  • With the 60 day rollover rule, you can ensure tax-free growth of your retirement savings
  • Failing to complete an indirect rollover within 60 days results in taxes and penalties
  • With this rule, you can avoid taxes, access short-term loans, and ensure timely transfer of retirement funds to maximize savings

What is the 60 Day Rollover Rule? Everything You Should Know

The 60 day rollover rule is a regulation of the IRS that allows you to reinvest your retirement funds into a different retirement account. without any tax or penalty. Moreover, this rollover rule allows you to transfer all your funds within 60 days. Before knowing more about what is 60 day rollover rule, you should be aware of what a rollover is. Well, it’s the practice of moving from one retirement account to another, considering that both accounts are non-like. 

“A rollover (or 60 day rollover) allows you to move money from one retirement account to another.” – Wikipedia

For example, if you want to transfer your funds from 457(b) to an IRA, it’s a rollover. And to do so, you have to follow certain rules – the rollover rules. One of these rules is called the 60-day rollover rule. Besides, if you are unable to follow the 60-day rule, you’ll have to pay the penalty.

“According to the 60 day rollover rule, the reinvestment of money should take place within 60 days.” – Investopedia

You may be wondering: when does roll over take place? Well, rollovers mostly take place because of these reasons:

  • Switching jobs
  • Transferring retirement assets from a 401k or 403b to an IRA
  • Rolling over from a traditional IRA to a Roth IRA
  • Getting a short-term loan

Quick Question: Rollover vs. Transfer. What’s the Difference?

A transfer refers to when you move your money from one retirement account to another similar account. On the other hand, a rollover involves the movement of money between two different types of retirement accounts. 

Why Should You Roll Over?

While discussing what is the 60 day rollover rule, you should know why rollover? What is it that leads you to roll over your retirement funds? Well, you should do it because this tactic will allow tax-free transfer of retirement funds. Yes, that’s right! TAX-FREE! Hence, by rolling over, you don’t have to lose your money to penalties and you can save more for the future. In other words, rollover can help you grow your retirement savings tax-free if you have a 403b or 457b or an IRA.

“By rolling over your retirement savings to another plan, you don’t have to tax until you make a withdrawal.” – Internal Revenue Service

What happens if you don't roll over 401k within 60 days?

You should know what happens if you don't roll over 401k within 60 days. Well, following the rule is mandatory when rolling over your money from one retirement account to another. But if you fail to transfer your complete funds within the given deadline – 60 days, you will have to pay a penalty that includes: 

  • The amount you are transferring becomes taxable
  • You have to pay additional taxes on the transfer
  • If you’re under 59 1/2, an early withdrawal penalty will apply too

So, why lose your money to fines? Be responsible, move your funds on time, and keep your retirement planning sorted. Furthermore, dealing with the complexities of transfers all alone can be overwhelming. Therefore, it’s always better to have retirement planning consultants by your side. Although you have 60 days, the IRS can exempt you from this requirement under certain conditions. So, if you couldn’t follow the rule because of unexpected or uncontrollable circumstances, you may not have to pay the penalty.

What are the Types of Rollovers?

As we are discussing the 60 day rollover rule, how does this rule work? For this, we have to discuss the types of rollovers you can avail of. Well, they are of two types:

  • Direct Rollover
  • Indirect Rollover

You should thoroughly understand both of them. After all, this is how you’ll be able to make the right decision for yourself. Also, the 60 day rollover rule applies to indirect rollovers mostly. However, it’s better that you focus on completing the transfer within 60 days even in a direct rollover. Let’s dive deeper into these types:

➢ Direct Rollover

This refers to the direct movement of your retirement assets or funds from one retirement account to another without your involvement. This means the distribution will not be paid directly to you. Instead, it will go straight into your new retirement account. All you need to do is request the plan administrator to move your funds. Moreover, a direct transfer is the easiest method to avoid taxes and early withdrawal penalties. Besides, it’s the safest way to transfer your funds. After all, you won’t be dealing with your funds yourself.

➢ Indirect Rollover

In this type of rollover, you have the control of your retirement assets. All your assets or retirement savings will be liquidated and given to you. It is either mailed to you in the form of a check or transferred to your personal account. Now, you are responsible for depositing the fund into your new account (403b or 401k or 457b or an IRA). Your indirect rollover can include the transfer of all or some of your money into your account.

Fast Fact!

The Internal Revenue Service only calls indirect rollovers 60 days rollovers. With it, you have 60 days to receive your rollover distribution and then transfer it to your new retirement account.

So, now you have a clear idea about both kinds of rollovers – direct rollover vs 60 day rollover (indirect rollover). Still, to make the whole information skimmable, here is a comprehensive comparison chart on 60 day rollover vs direct rollover. You can analyze it and gain knowledge on how each one of them works:

Direct Rollovers

Indirect Rollovers

1 Funds are directly transferred from old account to the new one. Assets or funds are transferred to you and you have to contribute them to a new account.
2 There is no direct involvement of the investor/contributor. The contributor/investor is directly involved in this rollover.
3 The 60 day rollover rule is not compulsory for it. Following the 60 day rollover rule is compulsory.

What Types of Plans Can I Rollover With the 60 Day Rule?

As aforementioned, rolling over means transferring funds from one retirement account to another. Plus, you should know that you can rollover your investments from and to just any account. Whether you have signed up for a 401k or 457b, you can roll over your money to any other account – of a different kind. Besides, if you are transferring the amount to another account of the same type, it will just be an ordinary transfer. 

According to the Rollover chart by the IRS, you are permitted to roll over your funds from:

  • IRA to IRA
  • Employer-sponsored plan to IRA
  • IRA to Employer-sponsored plan
  • Employer-sponsored plan to Employer-sponsored Plan

Keep in mind that employer-sponsored plans here refer to retirement plans to employees by employers or companies to help them save for retirement. Furthermore, these plans offer participants several tax-benefits. As a results, they are able to save more for the golden years of their life. These include a 457b or a 403b or a 401k etc. Also, always seek assistance from a professional consultant before making any decision.

Tax Regulations for the 60 Day Rollover

Your indirect or 60 day rollovers are subject to certain tax regulations you should know about. Besides, when your plan administrator transfers the money, here is the tax situation you and your money will go through:

  • The plan administrator automatically deduct taxes from this amount, which is usually around 20%. This means you’ll receive less amount than was taken out from your account.
  • When depositing the amount into the new account, you’ll have to make up for the amount deducted before you got the money. Otherwise, you’ll have to pay tax on the amount you are depositing.
  • If you redeposit the amount without making up for the taxes deducted. You’ll have to report the taxed amount as non-taxable income and the taxes deducted as taxable income and you may also have to pay a 10% penalty.

Also, keep in mind that if you fail to redeposit your amount into a new account within the deadline, it will be considered a withdrawal. Hence, you’ll have to pay tax on it just like on regular withdrawals. Plus, if you are under 59 1/2, you’ll have to pay the early withdrawal penalty too. So, be responsible, redeposit your money, and save yourself from being trapped in the tax maze.

What are the Advantages of the 60 days Rollover Rule?

Well, most people think that you can only use rollovers when switching jobs. However, it’s not true. With a proper strategy, you can use this practice to your benefit. Hence, you can maximize your retirement savings with rollovers. Amazing, right? Here is how you can do it:

• No Tax Worries

With the 60 days rule, you don’t have to worry about tax deductions and penalties. After all, if you follow the rule, you are exempt from all the additional fines. This means when you transfer amount from one retirement account to another, you won’t lose any money. Hence, you can have more funds to yourself for your dream life.

• Get a Short-Term Loan

You may have not thought about it that way but you can use rollovers to get short-term loans. Its life and anything can happen. You may go through a financial crisis or a health emergency. What if you don’t have money? W ell, in that case, you can borrow from your retirement account in the form of a rollover. But remember, you have to redeposit the amount within 60 days. Or else you will have to pay charges.

• Find the Right Custodian

With indirect rollovers – 60 days rollovers – you can have time to find the right custodian or financial institute for your retirement plan. After all, you have 60 days between withdrawing your assets from your old account and depositing them into a new one. Hence, you can use this time wisely to hunt a new IRA custodian for your retirement savings.

• Timely Transfer of Funds

This is a major advantage of 60 day rollovers. Well, as you already know that you have to abide by the 60 day deadline. This means that there is no other option than depositing your funds to your new retirement account before the 60 days end. So, to save your money going to taxes, you stay responsible. As a result, you sign up and redeposit you money to the new account on time.

Rolling Over Your Employer-Sponsored Account into an IRA

When you switch jobs or in any other case, this one is the safest and the most efficient option. After all, you are transferring your savings into a new account with better benefits. Plus, in case of a job switch, this option is really efficient. You have other options too but they involve heavy tax deductions. Moreover, this practice is quite common when a 401k plan is involved. 

It includes the following types of rollovers:

  1. Rolling over a traditional employer-sponsored plan to a traditional IRA
  2. Roll over a Roth employer-sponsored plan to a Roth IRA
  3. Rolling over a traditional employer-sponsored plan to a Roth IRA

Your plan administrator will guide you throughout the process. But you should always seek guidance from a 401k financial advisor. After all, they know how to navigate the nuances of rollovers. And will always provide you with insightful advice.

Benefits of Rolling Over to an IRA

You may be wondering why to transfer money to an IRA and not to an account of the same kind. Well, you should know that rolling over to an individual retirement account is more beneficial as compared to the former. Here are some benefits you can avail of:

  • You have a wider range of investment options and you can personalize them too
  • You have more control over your investment portfolio
  • Reduced management and administrative fees
  • It is easier to stay updated with changes when you have an IRA
  • You have to abide by fewer regulations which are comparatively clearer
  • IRAs are a better option as they will benefit your beneficiaries too

Ending Thoughts on the 60 day Rollover Rule!

As you already know by now, the 60 day rollover rule is all about moving your retirement savings from one non-like account to the other within the 60 day window. If you don’t want to pay a penalty following this rule is mandatory. Besides, you’ll have to follow this rule if you switch your job, want to rollover from a traditional IRA to a Roth IRA or want to roll over from an employer-sponsored plan to an IRA. Regardless of the reason, this practice has its own set of pros and cons. So, always consult a professional before you make any choice. After all, your decision will impact your financial future.

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