Key Roth IRA 60-Day Rollover Rules
Navigate the 60-day Roth IRA rollover process, including key timing rules and tax withholding, to ensure your funds are transferred without penalties.
A Roth IRA rollover allows for the movement of funds from another retirement account into a Roth IRA, a process governed by Internal Revenue Service (IRS) regulations. One method is the 60-day rollover, also known as an indirect rollover. This approach is defined by a strict time limit that individuals must follow to avoid potential taxes and penalties.
Understanding the 60-Day Rollover
A 60-day rollover is distinct from a direct, or trustee-to-trustee, rollover. In a direct rollover, the financial institution transfers funds directly to the new Roth IRA custodian without the account holder taking possession of the money. Conversely, the 60-day rollover involves the plan administrator distributing funds to the individual, who then has 60 days to deposit them into the destination Roth IRA.
A wide range of retirement accounts are eligible to be moved into a Roth IRA, including Traditional IRAs, SEP IRAs, and SIMPLE IRAs. Funds from employer-sponsored plans such as 401(k)s, 403(b)s, and governmental 457(b) plans can also be rolled over. Moving pre-tax funds, like those from a Traditional 401(k) or Traditional IRA, into a post-tax Roth IRA is a Roth conversion. This conversion is a taxable event, and the amount converted is included in the individual’s gross income for that tax year.
The IRS also imposes a once-per-year rule for certain rollovers. This regulation limits an individual to one IRA-to-IRA 60-day rollover within a rolling 12-month period. This means a second IRA-to-IRA rollover cannot be initiated within 365 days of a previous one. This limitation does not apply to direct rollovers or to conversions from an employer plan like a 401(k) to a Roth IRA.
Executing the 60-Day Rollover
The first step in executing a 60-day rollover is to contact the administrator of the current retirement plan and request a distribution. The administrator will issue a check made payable to the account holder, which starts the 60-day clock.
A consideration when rolling over from an employer-sponsored plan, such as a 401(k), is mandatory tax withholding. The plan administrator is required to withhold 20% of the distributed amount for income taxes. For example, on a $50,000 distribution, the administrator would send $40,000 to the individual and $10,000 to the IRS. To complete a full rollover of the original $50,000, the individual must use personal funds to make up for this shortfall.
The withheld 20% is not permanently lost; it is treated as a tax payment. The individual can recoup these funds when they file their annual income tax return, either as a refund or as a credit against their total tax liability. This requires planning to ensure personal funds are available to complete the full rollover amount.
After receiving the distribution, the final step is to deposit the entire intended rollover amount into the new Roth IRA before the 60-day period expires. The original financial institution will issue Form 1099-R to report the distribution. The individual will then need to properly report the rollover on their tax return, potentially using Form 8606 to report the conversion of pre-tax money to the Roth IRA.
The 60-Day Deadline
The 60-day count begins on the day after the individual receives the distribution from their retirement plan. This is a calendar day count, not business days, making accurate tracking of the timeline important. For instance, a distribution received on June 30 must be rolled over by August 29.
Failing to deposit the funds within this 60-day window carries financial consequences. The entire amount of the distribution is reclassified by the IRS as a taxable withdrawal. This means the funds are added to the individual’s ordinary income for that year and taxed at their marginal tax rate.
The financial penalties are more severe for individuals under age 59½. In addition to ordinary income tax, the distribution will be subject to a 10% early withdrawal penalty. This penalty is applied on top of the income tax, which substantially reduces the net amount received.
Options for a Missed Deadline
When an individual misses the 60-day deadline, the IRS provides limited avenues for relief. One option is to request a formal waiver by obtaining a private letter ruling (PLR) from the IRS. This process involves submitting a request explaining the reason for the delay and paying a user fee, making it a time-consuming and costly remedy. A PLR cannot be used to grant an exception to the once-per-year IRA-to-IRA rollover rule.
A more accessible option is the self-certification procedure. This allows a taxpayer to complete a late rollover without a PLR, provided the failure to meet the 60-day deadline was due to one of several specific reasons accepted by the IRS. A taxpayer may self-certify if:
- An error was committed by the financial institution.
- The distribution check was misplaced and never cashed.
- The funds were deposited into an account the taxpayer mistakenly believed was a retirement account.
- The taxpayer’s principal residence was severely damaged.
- A death in the family, serious illness of the taxpayer or a family member, or incarceration.
- Postal errors.
To use this relief, the individual must write a letter to the financial institution receiving the late rollover contribution, certifying that they meet the conditions for a waiver. The taxpayer should then file their tax return reporting the rollover as timely and keep a copy of the certification letter with their tax records.