The 60-Day Mistake That Triggers 20% Withholding

The 60-Day Rollover Rule and Its Costly Consequences

When you take a distribution from your 401(k) or IRA intending to deposit it elsewhere, you have exactly 60 days to complete the rollover. Not 61 days. Not “about two months.” Sixty calendar days from the date the funds leave your account.

Miss that deadline by even one day, and the entire distribution becomes taxable income. Plus, if you’re under 59½, you’ll owe the 10% early withdrawal penalty. And there’s another trap waiting: the 20% mandatory withholding that makes the 60-day window even harder to navigate.

The 20% Withholding Problem

When your 401(k) administrator sends you a check—rather than transferring directly to another custodian—they must withhold 20% for federal taxes. This is mandatory. You cannot opt out.

Here’s the math that catches people:

• You request a $100,000 distribution
• The check you receive: $80,000 (after 20% withholding)
• Amount you must deposit to complete the rollover: $100,000

Wait—you only received $80,000. To complete a full rollover, you must come up with $20,000 from other sources within 60 days. If you only deposit the $80,000 you received, the “missing” $20,000 is treated as a taxable distribution.

Real-World Impact

Let’s say you’re 52 years old in the 32% tax bracket. You take a $100,000 indirect rollover but only deposit $80,000 within 60 days:

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

You will recover the $20,000 withheld when you file your tax return (as a credit), but you’ve still created an $8,400 tax liability on money you intended to keep in retirement savings.

The Simple Solution: Direct Rollovers

A direct rollover (also called a trustee-to-trustee transfer) avoids this problem entirely. The funds move directly from your 401(k) to your new IRA without ever touching your hands. No withholding. No 60-day clock. No risk.

When initiating a rollover:

1. Contact your new IRA provider first
2. Request a direct rollover form
3. Submit the form to your 401(k) administrator
4. The check is made payable to “[New Custodian] FBO [Your Name]”
5. Even if the check is mailed to you, deposit it immediately with your new custodian

When Indirect Rollovers Make Sense

Despite the risks, some people intentionally take indirect rollovers for short-term use of the funds. This is essentially a 60-day interest-free loan from your retirement account.

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 on March 20, and you receive proceeds from your previous home sale. You deposit $50,000 into your IRA by April 29. No taxes owed.

This strategy is risky. If the house sale falls through or delays occur, you’ve created a taxable distribution. And you can only do one indirect rollover per 12-month period across all your IRAs.

The Once-Per-Year Rule

You are limited to one indirect (60-day) rollover from any IRA to any other IRA in a 12-month period. This is an aggregate limit—it applies across all your IRAs combined, not per account.

Direct rollovers have no such limit. You can execute unlimited direct rollovers in any time period.

What If You Miss the Deadline?

The IRS offers limited relief through a self-certification process. If you missed the 60-day deadline due to specific circumstances—death, disability, hospitalization, postal error, or other events beyond your control—you may be able to complete the rollover late.

Requirements:

• The contribution must be made to the IRA as soon as practicable (typically within 30 days of the reason for delay ending)
• You must provide a written self-certification to the IRA custodian
• The reason must fall within IRS-approved categories

“I forgot” or “I didn’t understand the rules” are not acceptable reasons.

Protect Yourself

Always request a direct rollover. If you must take an indirect rollover, mark the 60-day deadline on multiple calendars, set phone reminders, and have the full amount ready to deposit—including the 20% that was withheld. The cost of missing this deadline is simply too high.