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Be Careful When Using Your IRA Money During the 60-Day Rollover Period

If you have an IRA, you have access to your money at any time and for any reason (unless the IRA custodian has limits on your access). Unlike an employer retirement plan, such as a 401(k) or pension plan, you don’t have to ask anyone if you can take money out of your IRA to pay some bills. Your IRA is completely under your control, and no one can stop you from taking a distribution. But there are risks when you use your IRA funds for personal expenses during the 60-day rollover period.

The main risk is if you don’t roll over or put the money back within 60 days, the IRA distribution is no longer eligible for rollover. The law says you have 60 days from the day you received the IRA money to roll it over tax-free. If you don’t roll it over within 60 days, the IRA distribution you received will be taxable, plus, if you’re under age 59 ½ at the time you took it, there’s also a 10% early distribution penalty, unless an exception to the penalty applies. Some of the exceptions to the 10% penalty are disability, higher education expenses, and certain medical expenses. Note that there is no exception to the federal income taxes you will owe on an IRA distribution you don’t timely roll over and, for most Americans, the income taxes owed will be much more than 10%.

The risk of not rolling over the funds within 60 days is much higher when you use your IRA money for personal expenses during that time. For example, you may be short on cash and need to use your IRA as a sort of short-term bridge loan, and you may have every intention of rolling the money back into your IRA within 60 days so you won’t have to pay any federal income taxes, but if you don’t complete the rollover because you can’t come up with the money, your IRA distribution will be taxed to you.

-By Joe Cicchinelli and Jared Trexler


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Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.