5 Things You Need to Know About 60-Day IRA Rollover Loans
Written by: Kristy Welsh
Last Updated: May 24, 2018
Written by: Rick Pendykoski
If you’ve been saving retirement money in an IRA, you really shouldn’t be looking at this account as a source of emergency funds. Between the tax bill and penalties for early withdrawal, it’s best to just leave your IRA savings alone until retirement.
In times of dire need, you can use the 60-day rollover option to borrow against your IRA. Before you jump in, however, it’s important to carefully understand the IRA rollover rules and have a repayment plan in place. If you fail to follow the correct steps, you might end up losing a significant amount of money!
How Does a 60-Day IRA Rollover Work?
A 60-day rollover allows you to make IRA withdrawals without penalty, and use the funds as a loan for 59 days. You will not be charged taxes or penalties as long as you repay the funds within 60 days, into the same account from which you made the withdrawal or another IRA.
A certain amount may be withheld as income tax, which will be refunded after you file your returns. However, you will need to pay this amount out of your own pocket when you repay the loan, otherwise it will be treated as taxable income.
Let's take for example — If you make a withdrawal of $50,000 and are charged $10,000 as income tax, the amount you receive will be $40,000. The $10,000 will be refunded at tax time, but you need to repay the full amount of $50,000 within 60 days. If you don’t, the IRS will treat the withheld amount as an early distribution and levy penalties and taxes on it.
What Are the 5 IRA Rollover Rules to Remember?
Here are 5 things you need to keep in mind before borrowing from IRA savings:
1. Reporting Rollovers while Filing Taxes — Despite being tax-free, a 60-day IRA rollover needs to be reported as a nontaxable IRA distribution using a Form 1040 or Form 1040A. Fill in ‘0’ as the taxable amount if you repaid the entire withdrawal within 60 days, and write ‘rollover’ next to it.
2. Rollovers Aren’t Revolving Loans — After a rollover, you cannot take another tax-free withdrawal through the account from which you took the 60-day loan or any other IRA, for a period of 12 months. The only exception is when you convert a traditional IRA to a Roth IRA.
3. You CANNOT Go Over 60 Days — There are no extensions given for a 60-day IRA loan for any reason at all, even if the last day falls on a weekend or national holiday. To avoid taxes and penalties, make sure you don’t lose track of time and make the repayment as early as possible.
4. Watch Your Annual Contributions — Along with keeping track of repayment deadlines, you also need to check your IRA contributions before performing a rollover. If your 60-day rollover causes you to exceed the annual IRA contribution limits, you will pay a penalty for excess contributions.
5. Rollover Errors Will Cost You — Be very careful with a 60-day IRA rollover to avoid being hit with extra taxes and penalties. Mistakes such as accidentally requesting a second rollover within 12 months of the first or rolling over more than the annual contribution limit, cannot be corrected or reversed.
Proceed with caution when you’re considering a 60-day loan from your IRA, and arm yourself with knowledge about the rules and restrictions involved. To keep your withdrawal from being treated as a taxable distribution, make sure you can repay it within 60 days before applying for a rollover!
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email rick(at)sdretirementplans.com.