Roth 60 Day Rollover: Rules and Tax Implications
Executing a 60-day rollover to a Roth IRA has important tax and timing rules. Learn how to manage the process to avoid unintended tax consequences.
A 60-day rollover allows an individual to move funds from one retirement account to another without immediate tax consequences. This process involves taking a personal distribution and redepositing it into an eligible account within a specific timeframe. The Roth Individual Retirement Arrangement (IRA) is a popular retirement savings tool that offers tax-free growth and qualified distributions, operating with post-tax contributions.
Understanding the 60-Day Rollover Rules
The 60-day rollover period is a strict deadline set by the IRS. The clock starts on the day an individual receives the distribution from their retirement plan, not when the check is dated or mailed. To complete a tax-free rollover, the exact amount withdrawn must be deposited into another eligible retirement account within 60 calendar days. Missing this deadline has significant consequences; the entire distribution is treated as taxable income for that year. If the account holder is under age 59 ½, the distribution may also be subject to a 10% early withdrawal penalty.
An individual can only make one IRA-to-IRA 60-day rollover within any 12-month period, regardless of how many IRAs they own. This 365-day period begins on the date the first distribution is received. This limitation applies to rollovers between all types of IRAs, including Traditional, Roth, SEP, and SIMPLE IRAs. Violating this rule makes the second rollover an invalid transaction, rendering the distribution taxable and potentially creating an excess contribution in the new account. This rule does not apply to direct trustee-to-trustee transfers or conversions.
Tax Consequences of Roth Rollovers
When moving money from one Roth IRA to another Roth IRA, the transaction is a nontaxable event. Since contributions to a Roth IRA are made with after-tax dollars, transferring them to another Roth account does not create any new taxable income. The funds maintain their tax-advantaged status, continuing to grow tax-free with the potential for tax-free withdrawals in retirement.
Moving funds from a traditional, pre-tax retirement account into a Roth IRA is known as a Roth conversion, and it is a taxable event. Whether the funds originate from a Traditional IRA, SEP IRA, or SIMPLE IRA, the entire amount rolled over is added to your ordinary income for the tax year in which the conversion occurs. This can be a substantial amount, potentially pushing you into a higher marginal tax bracket. While the converted amount is subject to income tax, it is not subject to the 10% early withdrawal penalty.
When rolling over funds from an employer-sponsored plan, such as a pre-tax 401(k) or 403(b), to a Roth IRA, the transaction is also a taxable conversion. The plan administrator is required to apply a mandatory 20% federal income tax withholding to the distribution. For example, if you request a $20,000 distribution, you will receive a check for $16,000, with $4,000 sent to the IRS. To complete a full rollover of the $20,000, you must use $4,000 of your own personal funds to deposit the entire gross amount into the Roth IRA. The withheld amount can then be recovered when you file your annual tax return.
A rollover from a Roth 401(k) to a Roth IRA is a non-taxable event. Since the contributions to the Roth 401(k) were made on an after-tax basis, moving them to a Roth IRA does not trigger income tax on the contributions or their qualified earnings. However, any employer matching funds held within the 401(k) are pre-tax. If those matching funds are also rolled into the Roth IRA, that specific portion of the rollover will be considered a taxable conversion.
The Rollover and Tax Reporting Process
You will receive Form 1099-R from the institution that distributed the funds, showing the gross distribution amount. The receiving institution will issue Form 5498 to report the rollover contribution. When you file your federal income tax return, you will use Form 1040 to report the distribution and indicate that it was rolled over. If the rollover was a taxable conversion from a pre-tax account, you must also file Form 8606, Nondeductible IRAs, to calculate and report the taxable amount of the conversion.
Waivers for Missed Rollover Deadlines
If you miss the 60-day deadline, the IRS may grant a waiver under specific circumstances that are beyond your reasonable control. Valid reasons include errors made by the financial institution, a misplaced and uncashed distribution check, postal errors, severe illness or death of a family member, or severe damage to your principal residence. The IRS will not grant a waiver for reasons such as forgetting the deadline or not having the funds available to complete the rollover.
There are two methods for seeking relief. The first is a self-certification procedure, which can be used for a list of specific reasons outlined by the IRS. This involves submitting a letter to the financial institution receiving the late rollover, certifying that you meet the requirements for a waiver. An institution can accept the rollover based on this certification, but the IRS can review the validity of the waiver during an audit.
For situations not covered by self-certification, you must request a private letter ruling (PLR) from the IRS. This is a formal and costly process that involves submitting a detailed request and paying a user fee, which can be substantial. A PLR provides a binding decision from the IRS, offering definitive relief if granted.