If you fail to transfer your payment within the allotted time, it will be subject to taxation (except for Roth distributions and any amount already taxed) and you may also be liable for additional taxes, unless you qualify for one of the exemptions to the 10% early distribution tax. Missing the deadline for transferring an IRA to another eligible retirement plan or IRA can result in taxes and penalties. Fortunately, the IRS has created a self-certification procedure to make it easier to apply for an exemption if you have a valid excuse. The 60-day rollover rule applies specifically to indirect reinvestments.
If you don't meet the 60-day requirement, taxes and penalties will be imposed. You have 60 days from the date of receiving an IRA or retirement plan distribution to transfer it to another plan or IRA. However, if you are transferring from a traditional (tax-deferred) IRA to a Roth, you must declare and pay taxes on the funds (and associated profits) being transferred. Additionally, you cannot make a transfer during this 1-year period from the IRA to which the distribution was transferred.
If an employee changes from employment to self-employment (or something in between), they can move from a 401(k) to an IRA. Another form of direct reinvestment of an IRA is directly transferring assets between two plans, such as retirement plans (e.g., most pre-retirement payments received from a retirement plan or IRA can be “transferred” by depositing the payment into another retirement plan or IRA within 60 days). If the conditions are met, the plan administrator or the IRA trustee or custodian can accept your contribution as a tax-free cumulative contribution. The limit will be applied by adding up all of a person's IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as a single IRA for the purposes of the limit.
IRA rollovers have specific rules depending on how the funds are transferred (directly or indirectly) and the type of account to and from which they are transferred. It is technically possible to withdraw money from an IRA through indirect reinvestment and use it as a short-term loan. The IRS cumulative chart provides details on the plans that can be transferred to each other and also includes guidance on the annual limits of 60-day accruals. This means that if you have a SEP IRA, a SIMPLE IRA, a traditional IRA and a Roth IRA, they are all treated the same for reinvestment purposes under the 60-day rule.
Unless otherwise known, the plan administrator or the IRA trustee or custodian can rely on self-certification to determine if you have met the conditions to waive the 60-day renewal requirement. This way, the 60-day rollover rule provides an opportunity to apply for a short-term, interest-free “loan” from your QRP or IRA. Currently, there is no impact on federal income tax if a distribution from an IRA is properly transferred to the same IRA, to another IRA, or to an eligible retirement plan, such as a 401(k) plan.
