RMDs and the “Still Working” Exception
If you are still working and approaching the grand old age of 70, you may be wondering about the “Required Minimum Distribution” (RMD) that you will have to take each year to avoid IRS penalties. One thing that many people are not aware of is that IRAs are treated differently from 401K plans. Are you financially blessed, don’t need the money and not looking forward to being forced to take an unwanted RMD from your retirement account? Perhaps you want to delay those distributions if possible. You may have heard about the “Still-working” exception, which can allow RMDs to be put off, but are not sure how it works or to what it applies?
The still-working exception does not apply to IRAs. It only applies to company plans. If you are still working, that can’t help you delay RMDs from your IRA plans unless your company allows rollovers from IRAs into their 401K. Also, sadly, the exception will only apply to the company for which you are still working. If you have investments in other company 401K plans, you still have to take RMDs from them. Also, your plan may not allow the “Still working” out to be used and force you to take required minimum distributions even though you are still working for them. They are not required to make you take RMDs by IRS but some plans do that on their own. Hopefully yours does not. If one uses the “Still-working” exception, then RMDs begin in the year you separate from service. The required beginning date is April 1 of the year after separation from service.
Delaying the RMD may seem like a great idea if you have other investments and liquidity, but it not always the best idea. You may be locked into company stock or have a limited range of investments in the company plan versus an IRA or taking the money and investing it yourself. Folks who were fully invested in Enron stock in their 401k know that a lifetime of retirement can go up in smoke if concentrated in one thing. Taxes are also a concern. Yes, delaying an RMD delays paying the IRS, but unless you plan on working forever, at some point you will have an RMD and it will be larger as you will have a shorter life expectancy. That means more taxes later on down the road. If you die, your beneficiary will have an RMD even if they are under 70.
One final caveat, if you own 5% or more of your company, you must take required distributions even if you still work there. This can include other family members ownership interests as well.
This decision on RMDs can be a big one. A CFP, Chartered Financial Consultant, CPA or Enrolled Agent should be consulted if you are unsure of what to do.