If You Are Still Working, Do You Need To Take An RMD?

You’ve just turned 72, you are feeling good, you are still working for a living and contributing to your 401(k) at work. Should you have to take RMDs from your 401(k)?

Seventy-two is the age when you have to start taking required minimum distributions (RMDs) from your retirement accounts. “Age 72” replaced “age 70 1/2” as the current “RMD age” due to the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which was signed into law in December 2019.

If you are still working at age 72, do you have to take RMDs? What if you are 72 and aren’t planning on retiring anytime soon? That’s the question asked by a reader, R.C.

Delaying RMDs While Working

R.C. wants to know:

“I have not seen anything regarding when you reach the RMD age, but are still working full time and participating in a 401k through my employer, am I still subject to an RMD?”

The answer, like everything else: It depends — as I’ll explain.

If you are still working for a company when you reach the age for starting RMDs from your company’s 401(k), generally, you can delay taking the RMDs until you retire. (Internal Revenue Code, Section 401(a)(9)(C)).

The “generally” qualifier has to do with stock ownership in the company. If you own more than 5% of the business for which you are working, you cannot delay 401(k) RMDs. You have to start your RMDs at age 72. In that situation, you may be contributing to your 401(k) and taking RMDs at the same time. An odd result indeed.

What About IRAs?

Unlike 401(k)s, there is no comparable RMD “still-working delay” permitted for traditional IRAs (individual retirement arrangements). Even if you are still working and delaying your 401(k) RMDs, the same rule does not apply to IRAs that you might have outside of the company’s 401(k). Owners of traditional IRAs need to start their RMDs at age 72, whether they are working or retired.

But, There May Be A Work-Around

Consider a work-around, assuming the 5% rule doesn’t apply to you. But like everything else that has tax consequences, be sure to do nothing without your tax adviser.

The work-around depends on whether your 401(k) at work accepts rollovers from IRAs. If so, you may be able to transfer your IRAs (usually cash instead of holdings) into your 401(k). While this is not complicated, you must follow specific procedures that you will need your tax adviser to review. For example, you have to satisfy the IRAs’ RMDs before doing a transfer into the 401(k).

If you do move your IRAs into your 401(k), you’ll have zero balances in those IRAs. Your 401(k) RMDs will kick in when you retire. It’s worth a conversation with your employer’s 401(k) provider.

One more time, get advice before taking action — there are limitations and specific rules on how move the funds (check out how to “transfer” the IRA to the 401(k)).

When You Stop, RMDs Start

What happens when you stop working? RMDs start that year, even if you quit working on Dec. 31 of that year. As IRS Publication 575 (“Pension and Annuity Income”) notes, “Unless the rule for 5% owners applies, you must generally begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 72, or the calendar year in which you retire from employment with the employer maintaining the plan.”

Don’t Do Without Tax Advice

When you read about taxes, keep in mind that an educational discussion is general in nature. However, taxes are unique to the individual. Whenever you have potential tax liability, don’t take any action on your own before checking with your tax adviser.

Questions?

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