If you participate in a qualified retirement plan, such as a 401(k) or 403(b), you generally need to begin taking distributions from the plan no later than April 1 of the year after you turn age 70½. However, like most rules there’s an exception. This exception applies to certain plan participants who are still working for the entire year in which they turn 70½.
Required minimum distributions (RMDs) are the amounts you’re legally required to withdraw from your qualified retirement plans and traditional IRAs after reaching age 70½. The tax rules require you to tap into your retirement assets — and begin paying taxes on them — whether you want to or not. This can be detrimental to a taxpayer who is still working as it can cause their other income to be taxed at a higher rate.
Under the tax code, RMDs must begin to be taken from qualified pension, profit sharing and stock bonus plans by a certain date. That date is April 1 of the year following the later of the calendar year in which an employee:
- Reaches age 70½, or
- Retires from employment with the employer maintaining the plan under the “still working” exception.
Once they begin, RMDs must generally continue each year. The tax penalty for withdrawing less than the required amount is substantial, 50% of the portion that should have been withdrawn but wasn’t.
Of course, there is also an exception to the exception. If an owner-employee owns at least 5% of the company, they must begin taking RMDs as generally required, regardless of their work status.
The still-working rule doesn’t apply to distributions from IRAs (including SEPs or SIMPLE IRAs). So if you plan on retiring from your current job but not altogether retire, it is important to roll over your plan with purpose.
The law and regulations don’t state how many hours an employee needs to work in order to postpone 401(k) RMDs. There’s certainly no requirement that he or she work 40 hours a week for the exception to apply. However, the employee must be doing legitimate work and receiving W-2 wages for the entire year.
Careful Planning Required
The RMD rules for qualified retirement plans (and IRAs) are complex. With careful planning, you can minimize your taxes and preserve more assets for your heirs. If you’re still working after age 70½, it may be beneficial to delay taking RMDs but there could also be disadvantages. Please reach out to your Wegner associate to customize the optimal withdrawal plan based on your individual retirement and estate planning goals.