How Does the Roth IRA 60-Day Rule Work?
The 60-day rule for a Roth IRA refers to the amount of time you have after withdrawing your investment earnings 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 income taxes or penalties on the distribution. With a Roth IRA, you can withdraw your contributions tax and penalty-free anytime. However, that is not the case when withdrawing your earnings, meaning the interest and capital gains earned on your money over the years. If you withdraw the money earned in the Roth IRA and it’s not a qualified distribution, the Internal Revenue Service (IRS) requires you to pay income taxes and a 10% early withdrawal penalty on the distribution amount. One of the exceptions is if you roll over—or transfer—those funds into another Roth IRA or redeposit the money into your existing Roth within 60 days, you will not face a penalty nor a taxable event.
Indirect vs. Direct Rollovers
To understand how the 60-day rule works, it’s important first to review the different types of rollovers. A direct rollover is when your plan administrator withdraws your IRA funds and transfers the money directly into another retirement account on your behalf, often called a trustee-to-trustee transfer. In other words, you don’t handle the money. Instead, a direct rollover is a transfer between two financial institutions on your behalf from your old IRA to your new IRA. Conversely, an indirect rollover involves your financial institution cutting you a personal check or transferring the funds within the Roth to a non-IRA account.
Roth IRA 60-Day Rule
The 60-day rule—or the 60-day rollover—is for indirect rollovers or when you receive the funds via a transfer or a personal check. At that point, you can do whatever you want with the money. However, to avoid an early withdrawal penalty and income taxes, you must redeposit the funds into the original Roth IRA account or a new Roth IRA within the 60-day window. Also, 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 Roth account.
If You Miss the 60-Day Window
The earnings that you withdrew from your Roth IRA that are not rolled over will be considered a taxable distribution. In other words, if you withdraw the money from your Roth and don’t replace it in 60 days, that amount 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 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 particular set of eligibility criteria.
Example of the Roth IRA 60-Day Rule
Let’s say that you are under 59½ years of age, have a Roth IRA, and you withdraw $10,000 in earnings from your account to pay for medical expenses.
Funds Are Redeposited Within the 60-Day Window
A few weeks after paying your medical expenses, you apply and get approved for a loan from your bank for $10,000. You redeposit the $10,000 from the loan proceeds into your Roth IRA account five weeks after you withdrew the money. As a result, you would not pay income taxes nor any penalty since you redeposited the money within the 60-day window.
Funds Are Not Redeposited Within the 60-Day Window
Let’s say that you got denied for the bank loan, and you couldn’t redeposit the $10,000 into your Roth IRA within 60 days. As a result, the $10,000 would be added to your taxable income for that year, meaning you would have to pay federal income taxes on the withdrawal. Let’s say that the $10,000 put you into the 25% tax bracket; you would have to pay an additional $2,500 in income taxes (.25 * $10,000). You might also need to pay state income taxes if you reside in a state that charges income tax. Also, since you’re under 59½ years of age, you would have to pay a 10% penalty or $1,000 to the IRS. In total, it would cost you $3,500 (assuming no state taxes) to withdraw the $10,000 from your Roth IRA.
Risk of Using the 60-Day Window as a Loan
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, let’s say you have the opportunity to purchase a used car, but you need to come up with the cash quickly. You know you’ll be getting a sizable quarterly commission check next month, but you need the car now. As a result, you request a distribution from your Roth IRA to buy the car, knowing that you’ll be able to replace the money next month within the 60-day-rule window. The risk is that if something goes wrong and you can’t redeposit the money in 60 days, you could face taxes and early withdrawal penalties.
One Rollover Per Year Rule
Per the IRS, you can only do one rollover from an IRA to another IRA per 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. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! As a result, you’ll have to pay income tax on that amount, and if you’re not age 59½ or meet other exceptions to the IRA early withdrawal penalty, you will owe the IRS a 10% penalty.
