By Sarah Brenner, JD
IRA Analyst with Ed Slott
Are you approaching retirement age and not looking forward to being forced to take unwanted required minimum distributions (RMDs) from your retirement account? You may be looking for a way to delay those distributions. You may have heard about the still-working exception, which can allow RMDs to be put off. Will this exception help you? Here are 10 things you need to know.
1. 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.
2. 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.
3. Not all plans allow the still-working exception. They are not required to and many do not. You can’t use the exception if your plan doesn’t allow it.
4. What constitutes still working? There is no official position from IRS on this. There is no requirement that you must work 40 hours a week for the exception to apply. A part-time position would be considered still working for purposes of this exception.
5. You can’t use the exception if you own more than 5% of the company for which you are still working.
6. This is a one-time determination. If you are a “more than 5% owner” in the year you turn age 70½, you will never be able to use the still-working exception, even if you no longer own more than a 5% of the company.
7. When it comes to determining you are a 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 as well when making the call as to whether you are a more than a 5% owner.
8. 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.
9. 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 after-tax funds from an IRA.
10. Delaying your RMD using the still-working exception may sound like a great idea but there are downsides you should consider. You may face restrictions in the plan that would not apply to an IRA. You will begin taking RMDs later, which means you will be taking larger RMDs. Larger RMDs mean more income taxes, which can result in a tax hit. Your Social Security income could be taxed, and you could lose out on deductions, credits, exemptions and phase-outs.