Deadlines can be very stressful, especially when it comes to taxes. One stress that many people are not aware of is the 60-day deadline for keeping an IRA rollover tax-free. Why you may ask? Because missing the 60 day rollover rule can result in taxable income — and if you’re under age 59½, you may have to pay a 10% penalty as well.
The best way to avoid this stress is to ask your IRA trustee to make a direct transfer of your funds from one account to another. This option is considered a direct rollover and is not taxed, as the money was not actually received. Circumstances may change, though, if you have a short-term need for cash and you receive a distribution in the form of a check. In that case, the clock begins to tick on your withdrawal, commonly known as an indirect rollover. You have 60 days to redeposit the withdrawal into the same account or a new similar account. Otherwise you may have to include it as income on your tax return.
Not all withdrawals are eligible for rollover. For instance, after age 70½, you’re required to take minimum distributions from your traditional IRA — and those cannot be re-deposited into your account.
Two other restrictions to keep in mind
First, you can generally take advantage of the 60-day rule only once per year. Note that the “waiting period” applies separately to each of your IRAs. This one-per year limit does not apply to:
- Rollovers from traditional IRAs to Roth IRAs (conversions)
- Trustee-to-trustee transfers to another IRA
- IRA-to-plan rollovers
- Plan-to-IRA rollovers
- Plan-to-Plan rollovers
Second, you have to roll over the same property. That means if you receive cash, you need to put cash back in to qualify for tax-free treatment.
While the IRS rules may seem strict, there is some relief available. The best planning tip is to contact your Henry+Horne tax advisor before making a withdrawal to ensure the proper handling.
Danette Holguin, EA