What would you do differently if you had the chance to start your financial life over? Whether it’s caused by divorce, job loss, a major life change, or simply wishing you had made different choices, starting over financially can be an opportunity to rebuild with a better plan. In this episode of Wise Money, we discuss the money habits we’d prioritize, how we’d save and invest differently, and the financial moves we wish we had made earlier. Plus, learn what you can do in the final years before retirement to avoid looking back with financial regrets.
Season 12, Episode 3
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This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results. This video may discuss estate planning concepts but does not constitute legal advice. Please consult an attorney for advice specific to your situation.
What Is a 60-Day Rollover and How Does It Work?
When you take money out of a retirement account, you may assume the decision is final. But in certain situations, the IRS gives you a limited opportunity to put that money back into a retirement account without treating the entire transaction as a taxable distribution. This is known as a 60-day rollover.
A 60-day rollover can provide valuable flexibility, but the deadline and tax rules make it a strategy that requires careful planning. If you are starting over financially, changing jobs, moving retirement accounts, or navigating another major financial transition, understanding how this rule works can help you avoid an expensive mistake.
What Is a 60-Day Rollover?
A 60-day rollover occurs when you receive an eligible distribution from an IRA or employer-sponsored retirement plan and then deposit that money into an eligible retirement account within 60 days.
Unlike a direct rollover, where money moves directly from one retirement account to another, a 60-day rollover puts the money in your hands temporarily. The clock generally starts when you receive the distribution, and you have 60 days to complete the rollover.
If completed properly, the amount rolled over generally continues to receive tax-deferred treatment. If you miss the deadline, however, the amount you failed to roll over may become taxable income. If you’re younger than 59½, you could also face a 10% additional tax on an early distribution unless an exception applies.
Why Would Someone Use a 60-Day Rollover?
In many cases, a direct rollover or trustee-to-trustee transfer is the cleaner way to move retirement money because you never take possession of the funds. But there may be situations where someone receives a retirement distribution and then decides to roll it back into an eligible account.
The 60-day rule can essentially provide a limited financial “do-over.” But limited is the key word.
Sixty days may sound like plenty of time when you first receive the money. In reality, two months can pass quickly, especially when you’re dealing with a job change, home purchase, divorce, death in the family, or another major life transition. That’s why a 60-day rollover shouldn’t be treated as casual access to your retirement savings.
Watch Out for Tax Withholding
One of the biggest complications can occur when money is distributed directly to you from an employer-sponsored retirement plan.
Generally, an eligible rollover distribution from an employer plan that is paid directly to you is subject to 20% mandatory federal income tax withholding. If you want to complete a rollover of the entire distribution, you generally need to replace the amount that was withheld using money from another source.
For example, suppose you request a $100,000 eligible distribution from a 401(k) that is paid directly to you. If $20,000 is withheld for federal taxes, you may receive only $80,000. To roll over the entire $100,000 within the 60-day window, you would need to come up with the additional $20,000 from another source.
If you only roll over the $80,000 you received, the $20,000 that wasn’t rolled over would generally be treated as a taxable distribution and could potentially be subject to an additional early-distribution tax.
That’s one reason a direct rollover can be much simpler when your goal is simply moving retirement money from one account to another.
There’s Also a One-Rollover-Per-Year Rule for IRAs
Another important rule involves IRA-to-IRA 60-day rollovers. Generally, you can make only one IRA-to-IRA rollover within a 12-month period, regardless of how many IRAs you own.
However, that restriction doesn’t apply to every movement of retirement money. For example, trustee-to-trustee IRA transfers aren’t subject to the one-rollover-per-year limitation. Certain rollovers involving employer plans and Roth conversions are also treated differently.
This distinction is another reason it’s important to understand exactly what type of transaction you’re completing before moving the money.
Not Every Distribution Can Be Rolled Over
The 60-day rule doesn’t mean every retirement distribution can simply be put back.
Certain distributions aren’t eligible for rollover treatment. Examples can include required minimum distributions (RMDs), hardship distributions from employer retirement plans, and certain substantially equal periodic payments.
Before taking a distribution with the intention of completing a 60-day rollover, make sure the distribution is actually eligible.
Think Before You Touch Retirement Money
When you’re starting over financially, flexibility can be incredibly valuable. But so is protecting the retirement savings you’ve spent years building.
A 60-day rollover can be a useful tool in the right circumstances, but the short deadline, withholding requirements, eligibility rules, and potential taxes make it a strategy that deserves careful attention. Missing one step could turn what you intended to be a temporary movement of money into a taxable retirement distribution.
Before taking money out of an IRA, 401(k), or other retirement account, understand exactly where the money is going, how it will get there, and what deadlines apply. When possible, consider whether a direct rollover or trustee-to-trustee transfer can accomplish the same goal with fewer moving pieces.
When it comes to retirement accounts, the goal isn’t simply to move money. It’s to make sure every move fits into your broader financial plan.
