60-Day Rollovers Advantages and Disadvantages

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Many people see the 60-day window you are given to roll over your current retirement account into another retirement account as a stressful thing — but it doesn’t have to be. There can actually be a benefit to the IRS 60-day rule. That being said, there are some pitfalls that should be avoided so as not to cost you money. Let’s take a look at 60-day rollovers and how they work.

How Does a 60-day Rollover Work?

If you are changing employers and moving your IRA or 401(k) to a plan at your new place of employment, you would “roll over” the contents of your current retirement plan. This is typically done through a trustee to trustee transfer called a direct rollover. Because you were never in possession of the funds during the rollover, you do not have to pay any taxes or penalties for the transfer of funds. This is not considered a taxable distribution.

Another option is called an indirect rollover. Instead of the funds being transferred from custodian to custodian, the funds are handed over to you for deposit in the new account. This can be done with the full or partial value of the account. Your plan’s administrator will liquidate the account then either cut you a check or deliver your funds via direct deposit. Indirect rollovers are where the 60-day rollover rule comes into play.

The IRS gives you 60 days to complete the transaction, after which, you would have to pay any applicable taxes or penalties. If you are under 59.5 years of age, this would be a 10% early withdrawal penalty. Also, you are only allowed one rollover per year.

The IRS may waive the 60-day requirement in certain situations if the deadline is missed because of circumstances beyond your control. You may qualify for an automatic waiver or you may request a private letter ruling from the IRS along with a fee of $10,000.

How 60-day Rollovers Can Be Used to Your Advantage

Using indirect rollovers can be used to give yourself time to find the right IRA custodian or financial institution for your retirement savings. As long as the funds make their way to the new IRA or retirement plan within the 60-day window, there is no need to worry about the aforementioned taxes and penalties.
This is also a good time to consider if self-direction is a good fit for your investing needs within your IRA. Further, you have time to assess which type of account (Traditional IRA vs. Roth IRA) best suits your current strategy. This is something that you should discuss with your financial professional based on your income taxes and strategy.

It should be mentioned, however, that borrowing from your retirement plan will cost you money in the long run. It isn’t as simple as replacing money borrowed from a rainy-day, coffee-can fund. Also, it should not be a strategy for avoiding taxes.

When the retirement plan administrator liquidates the account and sends you the money, they will withhold 20% of the funds for tax purposes, however, the entirety (including the withheld 20%) has to be deposited in the new account.

To clarify, if you have taken $50,000 from the retirement plan, what you will actually receive is $40,000. When the time comes to deposit the funds in the new account, you must pay the full $50,000 back. Otherwise, that $10,000 withheld will be reported as taxable income and may be subject to an additional 10% tax penalty on early distributions if you are younger than 59.5. In a way, that short-term loan just cost you at least $10,000.

Is it worth it? 

Most financial advisors discourage their clients from doing indirect rollovers because of the potential for costly incidents. Should you decide that taking advantage of the 60-day rollover rule, keep documentation, set a reminder and date stamp your correspondence. Make sure that you will be able to deposit the full amount within the 60-day timeframe. because any amount that you are unable to redeposit — the 20% withheld, for example — must be reported to the IRS as taxable income and may be subject to additional taxes and penalties.

What can IRAR do for you?

IRAR Trust Company provides comprehensive education about self-directed retirement plans. Our knowledgeable staff can show you the ins and outs of self-directed IRAs so that you have the best possible information to make an informed investment decision.

If you are ready to take the next step toward planning for your financial future, contact us now for your free consultation

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