Final answer:
A rollover from a qualified retirement plan to another must be completed within 60 days after distribution to maintain its tax-deferred status and avoid penalties unless qualifying for certain exceptions.
Step-by-step explanation:
A rollover from a qualified retirement plan to another must be done within 60 days after distribution. This is essential to ensure that the rollover qualifies for tax-deferred status and avoids potential early withdrawal penalties. An explanation of this rule is important to understand why the 60-day period is crucial. When you receive a distribution from a qualified retirement plan such as a 401(k) or an IRA, you have the option to roll over the funds into another qualified retirement account.
If you complete the rolover within the specified 60-day period, the distribution is not taxable for the current tax year. However, if you fail to complete the rollover within this timeframe, the amount may be treated as taxable income, and additional penalties could apply if you are under the age of 59½. The IRS does provide for some exceptions where the 60-day rollover period may be waived, but these are typically limited to special circumstances such as natural disasters or other events beyond reasonable control.