The 60-Day Mistake That Triggers 20% Withholding

The 60-Day Rollover Rule and Its Costly Consequences

The 60-day rollover rule has gotten complicated with all the misinformation flying around. As someone who nearly got burned by this rule early in my career, I learned everything there is to know about it the hard way. Today, I will share it all with you so you can avoid the expensive mistakes I almost made.

Here’s the deal: when you take a distribution from your 401(k) or IRA with the plan to deposit it somewhere else, you get exactly 60 days to complete that rollover. Not 61. Not “roughly two months.” Sixty calendar days from the moment those funds leave your account.

Miss that deadline by even a single day? The entire distribution becomes taxable income. And if you’re under 59 and a half, tack on the 10% early withdrawal penalty. But wait — there’s another trap lurking that most people don’t see coming: the 20% mandatory withholding. That one makes the whole 60-day window significantly harder to navigate than it sounds.

The 20% Withholding Problem

When your 401(k) administrator cuts you a check — instead of transferring funds directly to another custodian — they’re required to withhold 20% for federal taxes. This isn’t optional. You can’t talk them out of it. It’s the law.

Here’s where the math gets ugly:

• You request a $100,000 distribution
• The check you actually get: $80,000 (because 20% was withheld)
• Amount you need to deposit to complete the rollover: still $100,000

See the problem? You only received $80,000, but to do a full rollover, you have to come up with the other $20,000 from somewhere — your savings, a credit line, whatever — within those 60 days. If you just deposit the $80,000 you got in hand, that “missing” $20,000 gets treated as a taxable distribution. It’s a trap that catches a surprising number of people.

Real-World Impact

Let me walk through a scenario that I’ve seen play out more than once. Say you’re 52, sitting in the 32% tax bracket. You take a $100,000 indirect rollover but only manage to deposit $80,000 within the 60-day window:

• Taxable distribution: $20,000
• Federal income tax at 32%: $6,400
• Early withdrawal penalty at 10%: $2,000
• Total damage: $8,400

Now, you’ll get that $20,000 withholding back as a credit when you file your taxes. But you’ve still created an $8,400 tax liability on money you intended to keep growing in your retirement account. That’s $8,400 that could have been compounding for another decade or two. It hurts just thinking about it.

The Simple Solution: Direct Rollovers

Probably should have led with this section, honestly. A direct rollover — sometimes called a trustee-to-trustee transfer — sidesteps this entire mess. The money moves straight from your 401(k) to your new IRA. It never touches your hands. No withholding. No 60-day clock ticking. No risk.

When you’re initiating a rollover, here’s how to do it right:

1. Contact your new IRA provider first — let them guide the process
2. Request a direct rollover form from the new custodian
3. Submit that form to your old 401(k) administrator
4. The check gets made payable to “[New Custodian] FBO [Your Name]” — that “FBO” (for benefit of) is the key detail
5. Even if the check happens to be mailed to your house, deposit it with your new custodian right away

When Indirect Rollovers Actually Make Sense

Despite all the warnings, some people do intentional indirect rollovers for short-term use of the funds. It’s basically a 60-day interest-free loan from your retirement account. I’m not going to pretend I haven’t considered it myself.

Example: You’re buying a house and need bridge financing. You take a $50,000 distribution from your IRA on March 1. Your home closes March 20, and you get proceeds from your old house sale shortly after. You deposit $50,000 back into your IRA by April 29. No taxes owed. Clean.

But here’s why this is risky: if that house sale falls through, or closing gets delayed, you’ve just created a taxable distribution. And there’s a big rule people forget — you can only do one indirect rollover per 12-month period across all your IRAs. One. That’s it.

The Once-Per-Year Rule

This trips people up all the time. You’re limited to a single indirect (60-day) rollover from any IRA to any other IRA within a 12-month period. And this is an aggregate limit — it applies across all your IRAs combined, not per account. So if you have four IRAs, you still only get one indirect rollover per year total.

Direct rollovers? No such limit. You can do as many direct transfers as you want, whenever you want. Just another reason to always go the direct route.

What If You Miss the Deadline?

OK, so you blew past the 60 days. All hope is not lost — maybe. The IRS does offer limited relief through what’s called a self-certification process. If you missed the deadline because of specific qualifying circumstances — death of a family member, disability, hospitalization, postal error, or other events genuinely beyond your control — you may be able to complete the rollover late.

Here’s what that requires:

• You need to make the contribution as soon as practicable, which the IRS generally interprets as within 30 days of the delay reason ending
• You have to provide a written self-certification to the IRA custodian explaining what happened
• Your reason has to fall within IRS-approved categories

And just to be clear: “I forgot” doesn’t cut it. Neither does “I didn’t know the rules.” The IRS has heard both of those a million times, and they’re not sympathetic.

Protect Yourself

My advice? Always — and I mean always — request a direct rollover. If for some reason you absolutely must go the indirect route, mark that 60-day deadline everywhere. Multiple calendars. Phone alarms. Ask your spouse to nag you about it. And make sure you have the full amount ready to deposit, including that 20% that got withheld. Scrambling to find $20,000 in bridge money with a deadline looming is not where you want to be. The cost of missing this window is simply too steep.