The 60-day rollover rule enables you to borrow money from your retirement plans tax- and penalty-free. You can utilize the rule once a year.
However, in general, I don't think it's wise to borrow from your retirement plans. If you do, you may get into the habit of robbing your retirement future. You may also have to pay a penalty and taxes for early withdrawal.
Let's explore what seems like a loophole. I say loophole because the IRS technically does not allow you to borrow money or take out a loan from any type of IRA unless you meet some specific conditions.
Penalty-Free IRA Withdrawals
Before we go into the nitty-gritty of the 60-day rollover rule, let's look at the following situations that allow for penalty-free withdrawals from your IRA:
- Disability
- Qualified higher education expenses
- First-time homebuyers up to $10,000
- Series of equal payments
- Unreimbursed medical expenses
- Distributions to qualified military reservists called to active duty
If you do not qualify for any of these penalty-free IRA withdrawal situations, this is where the the 60-day rollover rule comes in.
The 60-Day Rollover Rule To Borrow Penalty-Free From Retirement Plans
The IRS allows tax- and penalty-free rollovers from one tax-advantaged retirement plan or account to another if you follow the 60-day rollover rule.
The 60-day rollover rule requires you to deposit all your funds into a new individual retirement account (IRA), 401(k), or another qualified retirement account within 60 days of the distribution. You also have the option to use money from your account and then repay it within this timeframe.
If you fail to meet the 60-day deadline, your retirement funds will be subject to income taxes. And, if you're under 59½, an early withdrawal penalty of 10% will also apply.
The 60-day rollover rule is actually quite common given people job hop. Let's say you leave your job of five years with a 401(k) plan. You can either elect to leave your 401(k) plan as is with the company, or what most people do is roll over their 401(k) into an IRA.
An IRA generally has more flexibility, fewer fees, and more investment choices for the retirement saver. I rolled my 401(k) over into an IRA in 2012. And if I ever get a new job, I'll just start contributing to a new 401(k).
If you decide to roll over your 401(k) into an IRA, you've essentially have 60 days to do so penalty- and tax-free.
You Can Do Anything With The Borrowed Money
Let's say you have $1 million in your IRA. Thanks to the 60-day rollover rule, you could technically sell all your investments, and have a grand ol' time gambling and partying in Vegas for a week. You could even bet the $1 million on black and end up with $2 million!
So long as you deposit back the $1 million you withdrew within 60 days, you won't pay a penalty or any taxes. In this scenario, you'd even have $1 million gross left over! Ah, see how easy it is to get rich?
I'm kidding. Do not do this. You will likely end up broke and in debt.
The 60-Day Rollover Rule Is Unnecessary For Direct Rollovers
Once, I did a direct rollover from my Fidelity account to my Citibank account. I did so because I wanted to beef up my assets at Citibank to get relationship pricing for a lower mortgage rate refinance. Otherwise, I would have just rolled over my Fidelity 401(k) into a Fidelity IRA because the platform is better.
The reality is that most rollovers happen electronically with a direct rollover. The process usually takes less than ten days. Therefore, having 60 days to rollover your retirement plan is somewhat of an overkill.
If you don't want to conduct a direct rollover electronically, you can receive a check made out in the name of the new 401(k) or IRA account. Then you would send in the check to your new employer's plan administrator of the financial institution that has custody of your IRA. If you start your own business, you can deposit the check yourself.
A physical check is fine. But there is a risk that it could get lost or stolen in the mail. As such, having 60 days to roll over a retirement plan is a nice buffer in case something goes wrong.
With a direct rollover, worst-case scenario, you have deniability in saying you never actually took a taxable distribution should the funds not be deposited within 60 days.
The 60-Day Rule Is Primarily For Indirect Rollovers
The indirect rollover is where you take control of the funds to roll over the money to a retirement account yourself. You can make an indirect rollover with all or SOME of the money in your account.
This is where borrowing money from your retirement plan during the 60-day window tax- and penalty-free can occur.
The plan administrator or account custodian liquidates some or all of your assets. They either mail a check made out to you or deposit the funds directly into your personal bank/brokerage account.
You have 60 days from receiving an IRA or retirement plan distribution to roll it over or transfer it to another plan or IRA. If you don’t roll over your funds, you may have to pay a 10% early withdrawal penalty and income taxes on the withdrawal amount if you are under 59½.
How Taxes Work When Borrowing Money From Your Retirement Plan
Let's say you borrow $100,000 from your indirect rollover. When your 401(k) plan administrator or your IRA custodian writes you a check or electronically deposits the money to your checking account, by law, they must automatically withhold a certain amount in taxes, usually 20% of the total. So you would get less than the amount that was in your account.
In this case, you would receive $80,000 and have $20,000 withheld. Hence, if you actually need $100,000 to go on your bender to Vegas, you may have to borrow $125,000 to get $100,000 net.
Let's say you borrow $100,000 from your IRA and receive $80,000 net. You must pay back the $80,000 within 60 days to avoid paying penalties and taxes. If your 401(k) administrator or your IRA custodian sends you the full $100,000, then you must pay back the $100,000 within 60 days to fulfill the 60-day rollover rule.
However, if you fail to redeposit 100 percent of the proceeds, the difference will be taxable and subject to the 10 percent additional penalty, if you’re under 59½.
Watch out for withdrawal charges from the IRA custodian as well. Ask first before withdrawing.
Borrowing Money From An IRA WITHOUT Rolling It Over
Here's another loophole to borrowing money from an IRA or 401(k). It doesn't seem like you need to actually roll over your 401(k) or IRA into another plan to borrow money.
I was talking to my wealth advisor who said I can just borrow money from my IRA tax- and penalty-free so long as I return 100% of the funds within 60 days. If I do, it's as if nothing ever happened.
I've looked everywhere online and don't see any literature that says this is not possible. If you are from the IRS or a CPA with insights into the 60-day rollover rule, please feel free to chime in.
Borrowing Money From An IRA To Buy A House
The main reason why I wrote this post is because I am in need of extra funds to buy a house. I learned that selling individual municipal bonds is expensive, so I looked for other sources of capital. Given I'm not a first-time homebuyer either, I didn't qualify for a penalty-free IRA withdrawal of $10,000.
In my IRA, I've got $118,786.80 in a Treasury bond maturing on November 15, 2023. Given Treasury bonds are liquid, I should be able to get very close to market value at the time of the sale.
Alternatively, selling ~$118,786.80 worth of municipal bonds would cost me about 2.85%, or $3,385 to sell. In addition, I would give up the upside if I held them to maturity. Hence, by selling one $118,786.80 Treasury bond position in my IRA instead, I can save at least $3,000.
Normally, I don't recommend borrowing from an IRA to buy a house using the 60-day rollover rule. However, in this case, my Treasury bond is maturing soon anyway. I will need to figure out how to reinvest it. One obvious way is to reinvest the Treasury bond position in a house where I'm short funds for purchase.
The Greatest Challenge Is Depositing The Borrowed Money Back Into The IRA
If I proceed with the withdrawal, the challenge will be coming up with $118,786.80 within 60 days to avoid paying a 10% penalty and taxes. As far as I can tell, nobody is going to give me a job making $100,000 a month pre-tax to be able to deposit back 100% of the funds in 60 days.
If I fail to pay back 100% of the funds, I will have to pay at least $11,878.68 in penalties. Then I would have to pay income tax on the Treasury bond gains.
As a result, be careful withdrawing money using the 60-day rollover rule. If you are selling a highly-appreciated asset and don't pay back 100% of the funds, the tax liability and penalty may be overwhelming.
Stay Disciplined With Your Retirement Funds
What you withdraw money for is also important. If you're utilizing the 60-day rollover rule to pay for a medical procedure that will save your son's life, then do it. With no other financial options, you must save your son's life first and then figure out how to come up with the funds later.
If you want to withdraw IRA money for anything else, then perhaps you should leave your money alone. Your retirement plans are meant for retirement, not for current consumption.
Reader Questions and Suggestions
Anybody ever utilized the 60-day rollover rule to withdraw IRA funds tax- and penalty-free? If so, what did you utilize the funds for and how did you pay back the money? Can anybody clarify whether one can withdraw money from an IRA and NOT roll over their account if they deposit the money back within 60 days?
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How about putting the indirect rollover funds into a one-month CD? There are some that earn over 5% APR. For 100k that could mean over $400. I have to do a rollover soon anyway as I am leaving an employer. Making use of the funds in the interim never occurred to me.
You can just buy a CD in your rolled over IRA, or Treasury bonds yielding similar or higher yields.
Worked for primary residence: Used IRA funds to purchase all cash. Within 60 days got HELOC and returned money to IRA.
How much money did you withdraw and have to put back though? There’s this tax withholding issue that we need to understand and be aware of.
Approx 250K. Withdrew and put back identical amounts. Didn’t have to pay any taxes/witholdings/penalties.
Oh wow I had no idea these options even existed. I don’t have any plans to need to withdraw in the foreseeable future, but I’m glad to know that if I ever got into a situation where I needed the funds short term, I could do so. The only thing I’ve ever done with my retirement accounts is to turn my 401k into a rollover IRA, that’s pretty much it.
I used the 60 day withdrawal rule for the down payment on a house. I withdrew about 100k and deposited it back within about 25 days. I was waiting for money for my down payment to come thru but it would take me a month to get the funds and closing was within a few days. So, I went to my bank and they gave me a check right away from my Roth IRA. When I was ready, I called the banks finance office and they transferred the funds back to my Roth IRA, as if it never happened. My bank is Bank of America.
borrowed from ira to purchase new home.
then put house on market, when it sold , paid ira back.
back in 2018
You did all that within 60 days for a flip?
In late 2021 I had to perform an indirect 401k rollover into my IRA to get access to capital for a downpayment on an investment property that came on the market 3 days after paying back a 401k loan that I used to purchase an earlier investment property and I found out too late that I was locked out from borrowing the funds again for 12 months per the 401k rules at the time.
The market trended upward over the course of the previous 401k loan, so I lost some gains, but the investment property it bought is not “funny money.”
However, performing the 401k to IRA rollover meant that the 401k plan withheld the taxes from the amount being rolled over AND that meant that I had to rollover the remaining balance PLUS repay the taxes that were withheld. The tax that was withheld was then deducted from my tax burden when I filed my taxes.
But I was in a real liquidity bind because I had already gone under contract for the next property and I had to get the capital freed up and the 12 month lockout period after repaying the first loan was unknown to me at the time that I went under contract. (A plan rule, or law, that has since been changed. Yay!)
So I used a high interest loan for a couple of months to repay $13k of the needed funds, a $7k loan from the 401k that was still available, multiple low interest credit card balance transfers, and cash flow for the remaining $44k.
I got the money back into my IRA just under the 60 day rollover allowance and reinvested into VUG just a few days before it nosedived. In hindsight, I knew the market was overvalued and I thought about reinvesting the funds into something more stable like PPL, but I decided that timing the market is a fool’s errand, so I jumped back into VUG which then started to plummet.
I didn’t think of this until a few weeks later, but I could have simply held the funds in my IRA as cash and let it float in the money market to de-risk. But here I am 16 months later and still down 9.75% (~$6k) on VUG.
Right now with cash paying 5%, I’m considering de-risking and locking in some gains by pulling a loan on my 401k and paying off some of the revolving debt coming due soon so that I can bump my credit score and qualify for more 3% balance transfers on various credit cards in the future. Of course, if the market goes up then I’ll lose out on some of the gains on the 401k loan, but that’s nerfed by how much cash is paying and how much cheap debt is still available.
**Correction**
I had to repay the full amount of the rollover from my 401k to my IRA PLUS the taxes that were withheld by the 401k plan.
Thanks for sharing. This is an important point.
So your 401k provider withheld taxes and you were only able to get the next after taxes right? What was the holding percentage?
And when it was time to pay back the borrowed funds, not only did you need to pay back 100% of what she received, but also 100% of the taxes withheld?
For example, let’s say you wanted to borrow $10,000. You received $8000. Within 60 days, you actually had to pay back $10,000, so $2000 more than you actually got to prevent taxes and penalties? And only until you when you filed your taxes, were you able to get the $2,000 “back” as a credit on what you owed?
If so, it’s easy to see how a lot of people get in trouble, and are not able to pay everything back, especially since they all even more within 60 days!
Thanks for the clarification
It’s important to note that laws and rules around 401k and IRA rollovers have changed over the years.
The $20k in cash that I paid back into my 401k in late 2021 was not available for a loan for 12 months, but I paid off a smaller $7k loan in 1/2023 and those funds were readily available. The plan rep said it may have been due to a change in the law.
For my circumstances in 11/2021-1/2022, this is what I did:
Wired $27,517.42 from my IRA to myself as a rollover, which was not immediately subject to a tax withholding, and then performed an indirect rollover of $34,500 from my 401k which netted $27,505 because of $6885 in taxes and some processing fees. (The tax withholding was triggered because it was an indirect rollover.) I then had to roll that full $34,500 back into my IRA within 60 days. But the $27,517.42 portion from the IRA I could rollover back into the same account within that 60 day window without tax withholding or penalties.
But all 401k and IRA plans are different and rules change, so a person must read all of the plan’s terms and conditions thoroughly and understand the laws of the time. It’s also critical that the rollover funds be deposited and coded correctly so that they are documented as a rollover and not as a contribution.
I had access to a lot of cheap revolving debt, so overall I was able to keep my interest costs reasonable, but using that much revolving debt during the mortgage process would have tanked my credit score and raised my DTI ratio, whereas using the funds from my 401k and IRA was considered to be cash.
The real kicker is that I DCA’d VUG at $317.90 as I deposited the rollover checks into my IRA and shortly after VUG went on sale for more than 30% off. I could have held the rollover in cash and then capitalized on a “negative interest rate” bridge loan, so to speak, and IRAs have a lot more investment opportunities than a 401k. (There might be an article in that for you.)
It was a unique circumstance and the stress of having to pay back $62,062.42 in under 60 days was….unpleasant.
I only did it because a great property came to market and I, like you, consider any investment that can drop 30%, or more, in a few weeks or months to be….unpleasant, and therefore much less valuable than real estate.
Yes, I was about to comment the same thing. If they withhold taxes from the distribution, you have to put ALL of it back. so huge caution on that. I got caught on that stupid rule actually doing a rollover from my old company once. They were too backward to figure out a direct rollover, sent me a check -20% (which was nowhere near my tax bracket at the time) and since I did not have that much cash laying around, I got burned on the taxes they withheld.
So basically -using example numbers, not the actual- tried to rollover 100,000 grand, sent a check for 80, put the 80 back in, and the 20 grand in taxes was characterized as a “distribution” and taxable and with a 10 percent penalty.
So again using example numbers, from the 20 grand in taxes already paid, I technically was considered to owe 4 grand in taxes plus 2 grand as a penalty.
So that rollover cost 6 grand. ouch.
My reply seems to have been lost.
It’s important to note that laws and rules around 401k and IRA rollovers have changed over the years.
The $20k in cash that I paid back into my 401k in late 2021 was not available for a loan for 12 months, but I paid off a smaller $7k loan in 1/2023 and those funds were readily available. The plan rep said it may have been due to a change in the law.
For my circumstances in 11/2021-1/2022, this is what I did:
Wired $27,517.42 from my IRA to myself as a rollover, which was not immediately subject to a tax withholding, and then performed an indirect rollover of $34,500 from my 401k which netted $27,505 because of $6885 in taxes and some processing fees. (The tax withholding was triggered because it was an indirect rollover.) I then had to roll that full $34,500 back into my IRA within 60 days. But the $27,517.42 portion from the IRA I could rollover back into the same account within that 60 day window without tax withholding or penalties.
But all 401k and IRA plans are different and rules change, so a person must read all of the plan’s terms and conditions thoroughly and understand the laws of the time.
I had access to a lot of cheap revolving debt, so overall I was able to keep my interest costs reasonable, but using that much revolving debt during the mortgage process would have tanked my credit score and raised my DTI ratio, whereas using the funds from my 401k and IRA was considered to be cash.
The real kicker is that I DCA’d VUG at $317.90 as I deposited the rollover checks into my IRA and shortly after VUG went on sale for more than 30% off. I could have held the rollover in cash and then capitalized on a “negative interest rate” bridge loan, so to speak. (There might be an article in that for you.)
It was a unique circumstance and the stress of having to pay back $62,062.42 in under 60 days was….unpleasant.
I only did it because a great property came to market and I, like you, consider any investment that can drop 30%, or more, in a few weeks or months to be….unpleasant, and so much less valuable than real estate.
U have Ts in your IRA? There wasn’t anything at a higher spread that made sense given u lose the tax benefits for the T like a GNMA or something?
Yes, it is my only Treasury position. I could have certainly invested in a higher yielding investment that has higher risk. But I’ve been derisking as the stock market rebounds.
How is your IRA invested?
U lose the tax bene of state exemption.I understand the derisking – but at that point could have gotten 5%+ just on an fdic insured deposit that pays the same. Just didn’t understand lower yield for tax advantages account – coukd have gotten same US backing at higher yield which ends up being accretive because of the type of account it was being held in.
Actually, the Treasury yield was higher than the money market rate at the time I purchased.
Yields have been going up all year, which is great. So you’ve got to compare what yields were at the time of purchase, not what yields are then versus now. You’ve always got to do the after tax yield calculation before purchase.
Can you share what’s in your IRA and whether you’re also retired as well? It’s always good to see different styles as people are at different stages in their financial journey.
Maybe I can point out where you can optimize as well, especially if you’re still trying to achieve financial independence.
Hi D,
In a rising interest rate environment, you’ve got to calculate your after tax yield and build a bond ladder over time. The blended yield will increase.
Constructing a risk-adjusted portfolio composition takes dynamic thinking. Happy to help if you can share your age and goals.
Derek
I always calc my after tax yield. In an IRA u don’t get that tax shield hard stop on the T or Muni income.
I am not retired but can. My goals have been met and i just have done unfinished business in my career to achieve.
In my 401k and IRAs I have primarily index funds, BDCs, and structured credit/private credit investments across corporate, resi, consumer (or in PE style funds that invest in these instruments )
In taxable accounts direct index investing, direct munis and Ts, PE privates and some prefs. Cannot own single name stocks due to position.
Happy to elaborate.
There is not after tax yield when considering a IRA or 401k whether traditional or Roth.
So a GNMA will have the same after tax return as the treasury.
Both backed by full faith and credit of US
But GNMA will always pay higher than a UST for same duration at the time of investment. Just have to find one in secondary market off the run that matches the remaining maturity u want.
Everything we all do should always fully consider taxes.
The reason I do DDI type investing versus Index is to harvest the tax losses.
I have used the 60-day rollover rule also to help me buy a house. I was about $200k short on down payment to get the best rate even though my loan-to-value ratio is less than 60%. (The lender would only lend me max of $1M for a good rate.). So I took a risk and “rolled over” $200k from my 401k to my down payment. So I closed successfully on the new house and the 60 day counter started ticking on closing day. And before the 60 days were up, I got a $200k HELOC on the new house – which I cashed out immediately to actually rollover to the IRA. That 60 day waiting for the HELOC to approve and fund was the most stressful 60 days ever in my life. But I made it with a couple days left to spare :).
Ah hah! Brilliant! I didn’t think about trying to then get a HELOC to pay back the borrowed money. Thanks for the idea. This is something I’ll look into. Sadly, I know my main bank doesn’t do HELOCs right now.
Hope your house purchase worked out. That makes sense to try and get a better rate.
Do the math folks and run the downside risks if you don’t pay back some or all of the funds.
The 60 day rule is nice way to borrow money, briefly, from your future self without penalty. The rule clearly states that you can do this once per year. What if you have more than one IRA account? Can you do this once per year per account?
Good question. I don’t know. Hence, I would call them and ask and err on the side of caution by just doing it once. Let me know what you find out!
I hope people are not utilizing the 60-day rule more than once, if at all.