RMDs and the “Still Working” Exception: Planning Strategies

In general, qualified retirement plans require participants to begin taking the required minimum distribution (RMD) by April 1st of the year they turn 70 ½. Some plan participants, however, intend to keep working and want to take an exception to this rule, leaving the funds in their retirement plan to further grow. When taking the exception, then the RMD begins when the employee retires or is laid off from work with the employer who is responsible for maintaining the plan.

It’s important to note that this rule only applies to certain types of plans, not IRAs or qualified plan accounts belonging to individuals who own more than 5% of the company at the end of the year when the employee turns 70 ½. Further, for an employer-sponsored plan, a company can choose to prevent the individual from taking advantage of the still working exception and require that they take the RMD.

Maximizing the Benefit of the Still Working Exception

  • Increasing Value of the Employer’s Plan: The still-working exception applies only to the current employer’s retirement plan accounts and not any other retirement accounts. Thus, 401(k) plans with former employers are still subject to RMDs upon reaching age 70-½. A planning strategy to consider is rolling in amounts saved in other retirement plans or IRAs to the current employer plan (assuming the plan accepts these rollover) before the year when the employee turns 70 ½ to keep them from being subject to RMDs.
  • PartTime Employment: So long as an individual remains at least a part-time employee of the business that sponsors the retirement plan, then he or she can take the still working exception. This will cause the IRS less suspicion if the employee is still drawing a salary.
  • Lower Ownership Stake: If an employee wants to take the exemption but owns more than 5% of the business, it may be a good time to consider selling. Depending on the extent of ownership, this may mean selling shares of the business back to the business itself, to other owners, or coming up with a plan to retire and either sell or turn the business over to someone else.

Disadvantages of the Still Working Exception

  • Possible Restrictions: Even if an employer agrees to allow an employee to take the still working exception, the plan document itself many have some restrictions regarding this action. When the employer or the company administering the plan originally set up the plan, they may have chosen to penalize or limit access to exceptions.
  • Higher Taxes: When an employee delays taking the RMD, the investment continues to grow resulting in higher RMDs in the future. This may be the employee’s goal or it may lead to them finding themselves in a higher tax bracket than anticipated.

Having a team like the experienced benefits counsel at Hall Benefits Law on your side means having someone who understands the nuances of the different decisions involved in setting up an employer-sponsored retirement policy. Call our Georgia-based team today at 678-439-6236 or visit the Hall Benefits Law website to learn more about the different areas of benefits law we can help you handle.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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