60-Day IRA Rollover Rules: Limits, Penalties, and Alternatives

Key Points

• Investors often accumulate multiple IRA accounts over time, making it important to understand the rules governing IRA transfers and rollovers.
• A 60-day rollover allows assets withdrawn from an IRA or other eligible retirement plan to be redeposited into an IRA within 60 days without triggering taxes, provided all requirements are met.
• The IRS permits only one IRA-to-IRA 60-day rollover per individual in any 365-day period, regardless of how many IRAs the individual owns.
• The once-per-365-day limitation applies only to IRA-to-IRA 60-day rollovers and does not apply to trustee-to-trustee transfers.
• Rollovers involving employer-sponsored retirement plans (such as 401(k)s or 403(b)s) are not subject to the IRA rollover limitation, provided the plans allow such transactions.
• Failure to comply with the 60-day rollover rules may result in taxable distributions, early withdrawal penalties, and excess contribution penalties.
• A trustee-to-trustee transfer is generally the safest and simplest way to move IRA assets and avoids the risks associated with 60-day rollovers.

How many IRAs do you have in your name? You may be surprised to find out that it’s common for investors to accumulate multiple IRA accounts over time. Whether it’s a Simplified Employee Pension (SEP) IRA for your business or a Traditional IRA that was funded from an old 401(k) rollover, it’s relatively simple to open an IRA with a bank or other financial institution. To help manage your retirement assets, the IRS has several methods that will allow you to make nontaxable transfers between like-registered IRAs. One such method is the 60-day rollover. Because IRS regulations related to the 60-day rollover have been in effect for several years, it’s important for investors to understand these rules in order to avoid negative ramifications.

What Is a 60-Day IRA Rollover?

The 60-day rollover allows you to transfer assets from one IRA (or other eligible retirement plan, subject to plan-specific rules) to another IRA. Specifically, the IRS will allow you to withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan.¹ This is a nontaxable event for all assets redeposited into an eligible IRA. You could even remove assets from an IRA and redeposit the amount back into the exact same IRA within 60 days and it would fall under the 60-day rule. Assets removed from an IRA that are not deposited into an IRA within the 60-day time frame are considered a distribution and

are subject to income tax. If the IRA owner is under the age of 59½, this could also incur a 10% early distribution penalty.

60-Day IRA Rollover Limits and the Once-Per-Year Rule

Section 408(d)(3)(B) of the Internal Revenue Code provides details outlining that one IRA-to-IRA transfer performed in this manner is allowed per year. In the case of Bobrow v. Commissioner, the U.S. Tax Court examined this issue and determined that the one-per-year limitation on the 60-day rollover applies to all of an individual’s IRAs. Thus, an individual could not make an indirect IRA-to-IRA rollover if that person had already executed this type of rollover within the previous 365 days — despite the fact that the first rollover may have occurred in a different IRA.1

Which IRA and Retirement Plan Transfers Qualify?

All IRA-to-IRA transfers using the 60-day rollover are subject to the once-every-365-day limit. A transfer from a retirement plan, such as a 401(k) or 403(b), to an IRA does not have a limit on the number of times a 60-day rollover can be done within a year, provided the plan permits such rollovers. The reverse of this also applies. A transfer from an IRA to an eligible retirement plan like a 401(k) would not trigger the limitation on 60-day rollovers, subject to plan rules and asset eligibility. Further, Roth conversions (moving assets from a pre-tax IRA or retirement plan into a Roth IRA) also do not count toward the limitation on rollovers.

Penalties

If an individual were to perform a second rollover from one IRA to another utilizing the 60-day rule without waiting the full 365 days, then that entire amount would be considered a taxable distribution and taxed at ordinary income rates. Even more detrimental, if that person does not realize he or she has violated this provision and allows the rolled-over funds to remain in the IRA, it could be considered an excess contribution. If not withdrawn by the date your tax return is due for the year, an excess contribution is subject to a 6% tax. This 6% tax must be paid each year that the excess contribution amount, and the earnings it generates, remains in the IRA.

Alternatives to a 60-Day IRA Rollover

While this ruling can cause problems for investors who frequently utilize the 60-day rollover strategy, understand that there are other types of rollovers that do not have a restriction on the number of times they can be utilized in a year. The simplest method to transfer one IRA to another and avoid even the perception that you have taken control of the funds is to do a trustee-to-trustee transfer. With this method, you request that the trustee currently holding the IRA transfer the desired amount directly to the other trustee to be deposited into your IRA there. This allows you to avoid ever having the funds in your direct possession and would not trigger the limitation on rollovers. Typically, this is the type of IRA-to-IRA transfer that RMB advisors recommend to our clients.

Bottom Line

It’s important to make sure you understand the mandate established by the U.S. Tax Court and in effect since January 1, 2015, in order to properly plan for any expected IRA transfers. You also want to make sure that, if you are using the 60-day rollover, you are not violating the rules of its use.

• If you utilize the 60-day rollover this year, you will want to keep this date in mind when planning for a future rollover. For example, say you use the 60-day rollover this September to move an amount from your IRA at bank #1 to a new IRA that you just opened at bank #2. Now fast-forward to the following year and imagine you need a short-term loan that you plan to repay within 60 days. You would not be able to pull funds from any IRA that you own without this being a taxable distribution—even if it is your intention to move the balance back into the IRA within 60 days.
• When using the 60-day rollover, remember that you must deposit the same asset that is withdrawn. You cannot withdraw cash from your IRA, use that cash to buy shares of stock, and then redeposit those shares of stock. If cash is what was originally withdrawn from the IRA, then cash must be deposited within 60 days to avoid a taxable distribution.
• When using the 60-day rollover, it might be beneficial to get confirmation from the IRA custodian that your deposit was coded correctly as a rollover and not a contribution. Be attentive to the amount of time that has passed to avoid missing the redeposit window. Always consider using a trustee-to-trustee transfer as your first option when looking to make a rollover transfer. Taking the extra step to ensure that no inadvertent errors were made during this process can save you a lot of headaches later on.

Frequently Asked Questions (FAQ)

What is a 60-day rollover?

A 60-day rollover allows you to withdraw assets from an IRA or other eligible retirement plan and redeposit those assets into an IRA within 60 days without the withdrawal being treated as a taxable distribution.

How often can I do a 60-day rollover between IRAs?

You may complete only one IRA-to-IRA 60-day rollover per 365-day period, across all IRAs you own.

Does the once-per-year rule apply to trustee-to-trustee transfers?

No. Trustee-to-trustee transfers are not considered rollovers and are not subject to the once-per-365-day limitation.

Can I do multiple rollovers from a 401(k) to an IRA in the same year?

Yes, provided the employer plan allows rollovers. The once-per-year limitation does not apply to rollovers from employer-sponsored plans to IRAs.

Can I roll assets from an IRA into a 401(k)?

Yes, if the receiving plan allows it and the assets are eligible. These transactions are not subject to the IRA once-per-year rollover rule.

What happens if I miss the 60-day deadline?

If assets are not redeposited within 60 days, the amount withdrawn is treated as a taxable distribution and may also be subject to a 10% early withdrawal penalty if you are under age 59½.

What happens if I violate the once-per-year rollover rule?

The amount involved is treated as a taxable distribution. If the funds remain in an IRA, they may also be treated as an excess contribution and subject to a 6% annual penalty until corrected.

Do I have to redeposit the same asset I withdrew?

Yes. The asset redeposited must be the same type as the asset withdrawn (for example, cash must be redeposited as cash).

What is the safest way to move IRA assets?

A trustee-to-trustee transfer is generally the safest method because it avoids the risks associated with taking possession of the funds and does not trigger rollover limitations. ensure that no inadvertent errors were made during this process can save you a lot of headaches later on.