The 60-Day Rollover Rule To Borrow From Your Retirement Plans

The 60-day rollover rule enables you to borrow money from your retirement plans tax- and penalty-free.

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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