Required minimum distributions, or “RMDs,” are the government’s way of getting its tax money back on retirement accounts.
Starting at age 73, anyone with a pre-tax retirement account such as an IRA or a 401(k), must begin must begin withdrawing a minimum amount from this account each year. This triggers a tax event, generating the income taxes that you haven’t yet paid. It’s the IRS’ way of making sure that, sooner or later, you pay taxes on your pre-tax retirement contributions. Partially for that reason, RMDs don’t fully apply to post-tax accounts such as a Roth IRA.
But continued employment can be an exception to this rule – for certain account types. Even if you have reached the age cutoff, you do not have to begin taking RMDs from an employer-sponsored retirement plan as long as you still work for the employer sponsoring the plan. This is true even if you have dropped down to part-time work. But individual retirement accounts (IRAs) are a different story.
Here’s what you need to know.
What Are Required Minimum Distributions?
Starting at age 73, you must begin withdrawing money from any pre-tax retirement accounts that you hold, including IRAs, 401(k)s, SEP IRAs, 403(b)s and any other similarly-situated portfolios. These withdrawals are taxed the same as any other retirement fund withdrawals, so they are part of your taxable income for the year.
This rule does not apply to Roth IRA plans. Effective as of 2024, it will also no longer apply to Roth 401(k) and Roth 403(b) plans either, although RMD rules do apply to those plans for tax year 2023. All inherited Roth plans are still subject to the 10-year withdrawal rule.
This is called a “required minimum distribution,” or “RMD.” Previously, it applied starting at age 70 1/2. The SECURE 2.0 Act raised this age to 72 and then, from December 31, 2022, to age 73.
You must take your minimum distribution by the end of each year, although how you structure those withdrawals is at your discretion. The IRS determines the amount you must withdraw from each portfolio using a formula that weights the portfolio’s balance against your age and life expectancy. You may take more than the minimum from your portfolio, and most households do, but you pay either a 10% or 25% tax penalty if you take less than the minimum.
Talk to a financial advisor about the tax implications of your portfolio.
Required Minimum Distributions and Working
Continued employment can be an exception to RMD rules.
If you hold an individual retirement account, such as an IRA or SIMPLE IRA, and are over the cutoff age you must take your required minimum distributions. This is true even if you are still working in any capacity.
However you can delay taking RMDs from an employer-sponsored plan, such as a 401(k) or a 403(b), if you still work for that employer. There are a couple of specific requirements here:
- You must be employed by the company, not contracting
- You can only delay taking minimum distributions from a plan your employer sponsors
- You cannot own 5% or more of the employer sponsoring this plan
There are no minimum hours to the employment rule. So, for example, say that you have stepped down from full-time to part-time. You can still delay taking your required minimum distributions until you fully retire.
But the current-employer rule is an important one. For example, say that you have retired but then take a part-time job at your local bookstore. You must take RMDs from your former employer’s 401(k) plan. The fact that you have started working somewhere else doesn’t change that requirement.
The same is true of any retirement plans you hold with former employers. The fact that you can defer RMDs from one employer-sponsored plan will not affect your requirements for other, previous employers’ plans. Although you may be able to get around this issue by rolling a former employer’s retirement plan to your new employer’s plan.
So, here, you are 75 and still working. The answer, then, is this: You can avoid taking RMDs from any retirement plan that your current employer sponsors. If you have a 401(k) or other plan with this employer, you don’t have to take distributions from it. If you have an IRA or a retirement plan with a former employer, you do have to take distributions from those.
If you’d like to discuss your personal situation with a financial advisor, get matched today.
Bottom Line
Continued employment can be an exception to the rules around required minimum distributions. You don’t have to take distributions from a plan that your employer sponsors as long as you keep working for that employer.