By Sarah Brenner, JD
Director of Retirement Education
Tax rules require most retirement account owners who are subject to required minimum distributions (RMDs) to begin withdrawals at age 73. However, there is an exception to this rule for certain individuals who continue to work, called the “still-working exception.” Here is what you need to know about this strategy to delay RMDs.
Plans Only
The still-working exception applies only to employer plans. It does not apply to IRAs, ever (and that restriction includes SEP and SIMPLE IRA work plans). You may still be working but that will not help you delay RMDs from your IRA. Also, the exception will only apply to the plan of the company for which you are still working. If you have other funds in other company plans, it won’t help you with those. Not all plans allow the still-working exception. Most do, but it is not required. You can’t take advantage of the exception if your plan doesn’t allow it.
Who Is “Still Working”?
Are you “still working”? This can be tricky because there is no official guidance from the IRS on this. There is no requirement that you work a certain number of hours a week in order for the exception to apply. A part-time position could be considered still working for purposes of this exception. When you use the still-working exception, then RMDs begin in the year you separate from service – even if your last day of work is December 31 of that year. Your required beginning date (RBD) is April 1 of the year after separation from service.
More Than 5% Owner
You can’t use the exception if you own more than 5% of the company for which you are still working. This is a one-time determination. If you are a “more than 5% owner” in the year you turn age 73, you will never be able to use the still-working exception on that company plan, even if you no longer own more than 5% of that same company in the future. When it comes to determining whether you are more than a 5% owner, it’s a family affair. The analysis starts with your personal ownership in the business but does not end there. The Tax Code’s family attribution rules apply. Any ownership in the business by your spouse, child, or grandchild will be included when making the call as to whether you are more than a 5% owner.
Rollovers
If your plan allows, you can roll over other retirement accounts to your company plan where you are still working and delay RMDs on these funds, too. Any RMDs for the year would not be eligible for rollover, nor would any after-tax funds from your IRA.
Downsides
Delaying your RMD using the still-working exception may sound like a good strategy, but there are downsides you should consider. You may face restrictions in the plan that would not apply to an IRA. Also, eventually all the funds in the taxable retirement account must be distributed, and there will be a tax bill that cannot be avoided. You must begin taking RMDs later, which means you will be taking larger RMDs. Larger RMDs mean more income taxes, resulting in the possibility of your Social Security income being taxed, and you could lose out on deductions, credits, exemptions and phase-outs.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/what-you-need-to-know-about-the-still-working-exception/