What Is the 60-Day Rule for a Roth IRA?

60-Day Rule for a Roth IRA Explained

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The Roth IRA 60-day rule is a window of time in which you can withdraw your earnings and not be penalized or taxed—but only if you redeposit the money or roll it over to another Roth IRA within 60 days.

Some people use the 60-day rule, which is technically considered an indirect rollover, as an opportunity to access their funds as a short-term, interest-free loan. The catch is that the money must be replaced or you could face taxes and early withdrawal penalties.

Learn more about how the 60-day rule for Roth IRAs work, why it’s important to understand rollover rules, and what happens if you miss the 60-day window.

Definition and Example of the 60-Day Rule for a Roth IRA

The 60-day rule for a Roth IRA refers to the amount of time you have after initiating an indirect rollover to deposit (or redeposit) money into a new or existing Roth IRA account. If you get it done within 60 days, you won’t have to pay any taxes or penalties on the distribution.

With a Roth IRA you are able to withdraw your contributions tax- and penalty-free at any time, that’s not the case when it comes to withdrawing the earnings. If you try to take out money that was earned in the Roth IRA and it’s not a qualified distribution, expect to pay taxes and a 10% early withdrawal penalty on that amount. The one exception is if you rollover those funds into another Roth IRA or redeposit the money into your existing Roth within 60 days; neither of these options are taxable events.

The 60-day rule does not apply when you take a distribution from your Roth IRA as a direct IRA rollover or a trustee-to-trustee transfer, since both of those involve a direct payment to a financial institution. The rule is for when you have your account custodian cut you a personal check. At that point, you can do whatever you want with the money, but you must return it to the same account or open up a new Roth IRA within the 60-day window to avoid taxes and penalties.

With 60 days to work with, some people choose to leverage the 60-day rule to get a short-term, interest-free loan from their Roth IRA—even though you can’t technically borrow from an IRA. For example, say you have the opportunity to purchase a used car, but you need to come up with the cash ASAP. You know you’ll be getting a sizable quarterly commission check next month, but you’re afraid if you wait on that, someone else will buy the car. You decide to request a distribution from your Roth IRA to grab the car deal while it’s still available, knowing that you’ll be able to replace the money next month, within the 60-day-rule window.

You shouldn’t rely on the 60-day rule as a loan strategy unless you are 100% certain you’ll be able to replace the funds within the time frame. Otherwise, you’ll get hit with taxes and penalties.

How Does the 60-Day Rule Work?

To understand how the 60-day rule works, you have to first learn about the different types of rollovers.

Indirect vs. Direct Rollovers

A direct rollover is when your plan administrator deposits a payment directly into another retirement account on your behalf. Whereas with an indirect rollover, your financial institution cuts you a personal check, then the responsibility shifts to you. You have 60 days to put the funds back into a Roth IRA, or you will pay applicable taxes and penalties. A Roth IRA rollover can only be rolled into another Roth, not a different type of retirement account, or you can redeposit the money into the original account.

Unlike employer-sponsored plans such as a 401(k), which require an automatic tax withholding when you do an indirect rollover, federal income tax typically is not withheld from distributions from a Roth IRA. It’s always a good idea to clarify this with your custodian, however, as rules can vary by financial institution.

If You Miss the 60-Day Window

Any portion of your Roth IRA not rolled over will be considered a taxable distribution. In other words, if you take $10,000 from your Roth and don’t replace it in 60 days, that $10,000 will be added to your taxable income and you’ll have to pay tax on it. In addition, if you’re not 59½ or meet other exceptions to the IRA early withdrawal penalty, you will owe the IRS an additional 10%.

In rare cases, a consumer might try to redeposit or request a rollover in time, but something goes wrong on the financial institution’s end. If being late is truly no fault of your own, you might be able to get an automatic waiver of the 60-day rule from the IRS. Just note that this will involve meeting a very specific set of eligibility criteria.

Only One Rollover Per Year

If you are able to leverage the 60-day rule to your advantage, it could be a useful tool. However, it’s not something you can do often. The rule is you can only do one rollover from an IRA to another per fiscal year (365 days from the day of the rollover). Even if you redeposit the funds into the same Roth IRA, it still counts as a rollover because you technically withdrew the funds.

Key Takeaways

  • The 60-day rule for Roth IRAs refers to how long you have after requesting an indirect rollover to redeposit the money back into your existing Roth IRA account, or roll it over to a new Roth, without taxes or penalties.
  • Some people take advantage of the 60-day rule to borrow funds interest-free for a short period of time.
  • If you miss the 60-day window, the amount of the distribution becomes taxable income. If you are not age 59½ or don’t meet the other qualified distribution exceptions, an additional 10% penalty will be applied.

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