How to Report a 60-Day Rollover on Your Taxes Properly
Learn how to accurately report a 60-day rollover on your taxes, ensure compliance with IRS rules, and understand potential tax implications.
Moving retirement funds from one account to another through a 60-day rollover has tax implications. This process allows individuals to withdraw money from a retirement account and redeposit it into another eligible account within 60 days without incurring taxes or penalties. However, failure to report it correctly can lead to unexpected tax liabilities.
Understanding how to properly report a 60-day rollover on your tax return is essential to avoid complications with the IRS.
Basic Criteria for a 60-Day Rollover
To avoid taxes and penalties, the IRS requires that withdrawn funds be redeposited into another eligible account within 60 calendar days, including weekends and holidays—no extensions are granted. If the funds are not redeposited in time, the withdrawal is treated as a taxable distribution, subject to income taxes and, if the account holder is under 59½, a 10% early withdrawal penalty.
Only one 60-day rollover is allowed per 12-month period across all IRAs, as outlined in IRS Publication 590-A. This rule applies to the total of all IRAs, not per account. A second rollover within the same year is considered a taxable distribution, and any excess contributions to the receiving account may incur a 6% excise tax.
The IRS mandates that the same assets withdrawn be redeposited. If cash is taken out, the same amount must be returned. If securities are withdrawn, those exact securities must be placed back into the new account. Any shortfall is considered a taxable distribution. Additionally, if the original withdrawal was subject to mandatory 20% withholding—common in employer-sponsored plans—the withheld amount must be replaced from other funds to avoid taxation on the shortfall.
Eligible Accounts
Not all retirement accounts qualify for a 60-day rollover. Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs allow rollovers, though tax treatment varies. Employer-sponsored plans such as 401(k)s, 403(b)s, and governmental 457(b) plans also permit rollovers but often involve mandatory withholding.
When moving funds between pre-tax accounts, such as from a Traditional IRA to another Traditional IRA or from a 401(k) to an IRA, the transaction remains tax-deferred. However, rolling a pre-tax 401(k) into a Roth IRA triggers a taxable event, as Roth accounts are funded with after-tax dollars. This conversion requires reporting the transferred amount as taxable income.
Certain funds cannot be rolled over. Required minimum distributions (RMDs), which must begin at age 73 for traditional retirement accounts, are ineligible. Distributions from inherited IRAs generally cannot be rolled over unless the beneficiary is a spouse who elects to treat the account as their own. Failing to recognize these restrictions can lead to unintended tax liabilities and penalties.
Reporting the Rollover on Tax Forms
Even if a 60-day rollover is completed correctly, it must be reported on your tax return. The financial institution issuing the distribution will generate Form 1099-R, which reports the withdrawal amount. This form is issued even if the full amount is redeposited, often causing confusion for taxpayers who assume a properly executed rollover would not be documented.
On Form 1040, the total amount withdrawn should be entered on line 4a for IRAs or line 5a for employer-sponsored plans. The taxable portion (if any) is reported on line 4b or 5b. If the full amount was rolled over, the taxable portion should be recorded as zero, with “Rollover” written next to the line to clarify the transaction. The IRS cross-references tax returns with Form 1099-R, and failing to indicate a rollover could trigger an inquiry or audit.
If a portion of the distribution was withheld for taxes, that amount is still considered part of the distribution and must be reported. The withheld funds can be claimed as a credit on line 25b of Form 1040, reducing overall tax liability. However, if the taxpayer does not replace the withheld amount when completing the rollover, the shortfall becomes taxable and may incur penalties.
Calculating Taxable Amount
The taxable portion of a 60-day rollover depends on whether the full distribution was redeposited and how withholding was handled. If the entire amount is rolled over within 60 days, no taxes are owed. However, if only a portion is returned, the remaining balance is treated as a distribution and must be included as ordinary income.
If the rollover includes after-tax contributions, the IRS requires the use of the pro-rata rule. This means any rollover must consist of a proportional mix of taxable and non-taxable funds. For example, if an IRA has a balance of $100,000, with $20,000 in after-tax contributions, then any rollover must include 80% taxable and 20% non-taxable funds.
If the Rollover Is Not Completed on Time
Failing to complete a 60-day rollover on time results in the distribution being treated as taxable income, potentially pushing the taxpayer into a higher tax bracket. If the account holder is under 59½, an additional 10% early withdrawal penalty may apply.
In some cases, the IRS may waive the 60-day deadline if the delay was due to circumstances beyond the taxpayer’s control. This requires a private letter ruling request, which includes a detailed explanation and a $12,600 user fee as of 2024. An automatic waiver is available if the financial institution was responsible for the delay, provided the funds were deposited within a reasonable period after the error was corrected. Taxpayers who miss the deadline and do not qualify for a waiver must report the distribution as income and may need to adjust estimated tax payments to avoid underpayment penalties.