Is There a Way Around the 10% Early Distribution Penalty? This Week’s Q&A

By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

This week’s Slott Report Mailbag looks into the one-rollover-per-year rule, RMDs and the 10% early distribution penalty. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.


A couple months ago I took my RMD from a New York bank and deposited it into a savings account in Florida where I live.

In the first week of December, I have an IRA CD in New York maturing and I plan to bring it down to Florida. I am rolling it over into another IRA CD here. I understand the rule by the IRS is that you can only make one rollover per year, which is what I would be doing. The other was my RMD to use as I wish. Would the IRS get these two confused and think they were both rollovers?

I have been told to do it as a bank to bank transfer, but I do not want to pay the $40.00 they will charge me to do this between banks. The banks in New York involved should be telling the IRS, “One is an RMD and one is a rollover for 2017.”

Please advise if this is correct. Thanks for your help.


So far so good! You already took your RMD from your IRA. You have avoided the all too common mistake of rolling over the entire IRA without taking the RMD that is due for the year. This results in an excess contribution in the receiving IRA and potential penalties that may go on for years. Not a result that you want. Your New York bank will report the distribution of both the RMD and remainder of your IRA account on Form 1099-R. Your Florida bank will report the rollover on Form 5498. You too will be doing some reporting on your tax return. You will report the RMD as received and the remainder of the funds as rolled over. On Form 1040, you will include the full amount of both distributions on line 15a (11a on Form 1040A) and on line 15b (11b) you will only use the amount of the RMD. You will put the letter R on that line also to tell IRS the balance of the distribution was rolled over. Based on the facts as you have explained them, there should be no issue with the once-per-year rollover rule because you are only rolling over one distribution. You received the distributed RMD and you did the right thing by keeping it and not rolling it over.

One word of advice, you may want to reconsider your decision not to move your IRA money by way of a trustee-to-trustee transfer. While no one likes paying fees, transfers are the safest way to move IRA funds without the concern of violating one of the many rules that govern 60-day rollovers.


Good morning. We are struggling to find an answer to this question and wondering if you can help?

A client leaves employer #1 at age 53. He leaves his 401k with employer #1. The plan allows separation of service withdrawals. He is now 58 and looking to retire from employer #2.

Can he take withdrawals from his 401k at employer #1 penalty free?


A 10% penalty applies to distributions taken from retirement plans before reaching age 59 1/2. However, there are a number of exceptions to the penalty. If one of those applies, a distribution from the plan would be penalty-free.

The client may be thinking about the age 55 exception. If a plan participant was 55 years old or older in the year they left their job, distributions from the company plan will be subject to tax but no 10% penalty. The date of separation from service is the determining factor, not the distribution date. To qualify for the penalty exception, separation from service must occur in the year the person turns age 55 or older. In this case the client, separated from service at age 53 so this exception would not apply.

If the client’s new employer has a plan that allows rollovers, a possible strategy may be to roll over the funds into the new employer’s plan and take distributions from that plan upon retirement.


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