No, an RMD is not required from your current employer’s retirement plan if you are still working past age 73, provided you own 5% or less of the company and the plan allows this exception. However, RMDs remain mandatory from traditional IRAs regardless of employment status. This creates a planning opportunity for individuals who continue working in their 70s, but the rules contain numerous traps and limitations that can trigger unexpected tax bills and penalties.
The Internal Revenue Code Section 401(a)(9) establishes the required minimum distribution framework, forcing retirement account owners to begin withdrawing funds at age 73 to trigger taxable income. The penalty for missing an RMD now stands at 25% of the amount not withdrawn under the SECURE Act 2.0, and this consequence applies immediately when distributions fall short. According to IRS statistics, millions of Americans face RMD requirements annually, yet confusion about the still-working exception causes thousands to either take unnecessary distributions or miss required ones.
In this article, you will learn:
📋 The precise rules for qualifying for the still-working exception across 401(k), 403(b), 457(b), and IRA accounts
🏢 How the 5% ownership threshold applies through family attribution rules that can unexpectedly disqualify you
⏰ Critical timing requirements including the determination year that permanently locks in your RMD obligation
💼 Strategic rollover techniques to consolidate multiple accounts and maximize the still-working benefit
⚠️ Common mistakes that trigger penalties and how to correct missed RMDs through IRS Form 5329
Understanding Required Minimum Distributions and Employment Status
Required minimum distributions represent the government’s mechanism to collect deferred taxes on retirement savings. When you contribute to traditional retirement accounts, those contributions reduce your taxable income in the contribution year. The government eventually demands payment through mandatory withdrawals calculated using IRS life expectancy tables that increase each year as you age.
The SECURE Act 2.0 changed the starting age for RMDs from 72 to 73 beginning January 1, 2023. Starting January 1, 2033, the age will increase again to 75. If you reached age 72 on or before December 31, 2022, you already started RMDs under the old rules and must continue regardless of the new age thresholds.
Why the Still-Working Exception Exists
The still-working exception reflects Congressional recognition that individuals continuing employment may not need retirement funds and should not face forced withdrawals while earning income. The logic: if you remain employed and contributing to your current employer’s plan, the government can wait to collect taxes until you actually retire and begin living off those savings.
However, this exception contains strict boundaries. It applies exclusively to qualified employer-sponsored plans including 401(k), 403(b), and 457(b) accounts. Traditional IRAs receive no such relief regardless of employment status, creating a split treatment that requires careful navigation.
The distinction matters significantly because many workers maintain both IRAs and employer plans. A 74-year-old working full-time at a hospital can defer RMDs from her 403(b) but must still withdraw from her traditional IRA holding rolled-over funds from a previous employer. This split creates tax planning complexity and potential confusion.
The Core Requirements for Delaying RMDs While Working
Three absolute requirements must align for the still-working exception to apply. Miss any one element and RMDs become mandatory regardless of employment.
Requirement 1: Current Employment Status
You must remain employed by the company sponsoring the retirement plan. The IRS has never defined minimum work hours required to qualify as “still working,” creating flexibility but also uncertainty. Most tax professionals agree that any bona fide employment relationship suffices, whether full-time or part-time.
A doctor reducing her schedule from five days weekly to two days weekly still qualifies as employed. A professor teaching one course per semester remains employed by the university. A retail manager working 10 hours weekly continues meeting the employment test. The determining factor is whether the employer treats you as an employee for payroll and tax purposes, not the number of hours worked.
Contractors and independent consultants do not qualify. If you receive a Form 1099-NEC instead of a Form W-2, you lack the employment relationship necessary for the exception. A 73-year-old former executive consulting for his old company through an LLC must take RMDs from any retirement plan at that company because he operates as a vendor, not an employee.
The employment must continue through December 31 of each year to maintain the deferral for that year. Retiring on December 31 means you retired in that calendar year, triggering RMD requirements by April 1 of the following year. Working even one day in January pushes retirement into the next year, delaying the first RMD by a full 12 months.
Requirement 2: The Plan Must Allow the Exception
The still-working exception is optional for retirement plans. Plan sponsors must explicitly adopt this provision in their plan documents, though most plans include this feature as the default option. However, some employers require all participants to begin RMDs at age 73 regardless of employment status.
Before assuming you qualify, request written confirmation from your plan administrator. The Summary Plan Description should state whether the still-working exception applies. Government plans including federal Thrift Savings Plans permit the deferral for employees still working past age 73.
Some plans impose additional restrictions beyond IRS requirements. A plan might require full-time status or minimum annual hours to qualify for the exception even though the tax code contains no such limitation. These employer-imposed requirements bind participants despite being more restrictive than federal law.
Requirement 3: You Cannot Own More Than 5% of the Company
The 5% ownership rule represents the most complex and frequently misunderstood requirement. The Internal Revenue Code Section 416 defines a 5% owner as someone who owns MORE than 5% of the business, meaning exactly 5% ownership does not disqualify you. Owning 5.1% triggers the restriction.
For corporations, ownership is measured by either outstanding stock percentage or voting power percentage, whichever is greater. A person holding 4% of stock but controlling 6% of voting rights qualifies as a 5% owner. For partnerships and LLCs, ownership is determined by either capital interest or profits interest, again using whichever percentage is higher.
The determination occurs once in your lifetime during the “determination year,” which is the plan year ending in the calendar year you reach age 73. If you qualify as a 5% owner in that specific year, you remain permanently classified as such for RMD purposes even if you later reduce ownership below 5%. Conversely, if you own 5% or less during the determination year, later ownership increases will not disqualify you from using the still-working exception.
Family Attribution Rules: When Others’ Ownership Becomes Yours
The 5% ownership calculation includes not just your direct holdings but also stock and ownership interests held by specific family members. IRC Section 318 constructive ownership rules attribute the following relationships to you:
| Family Member | Attribution Applies |
|---|---|
| Spouse | Yes (unless legally separated or divorced) |
| Children | Yes (including legally adopted, regardless of age) |
| Parents | Yes |
| Grandparents | Yes |
Attribution does not extend to siblings, grandchildren, aunts, uncles, nieces, nephews, or cousins. This creates specific planning opportunities and traps.
Real-World Attribution Scenarios
Scenario 1: Parent Working for Child’s Company
Roger, age 74, works part-time as a consultant for Local Hardware Store Inc. He directly owns 0% of the company, having gifted all shares to his two daughters who each own 50%. Despite owning no shares himself, Roger must take RMDs from the company 401(k) because his daughters’ 100% combined ownership is attributed to him. The family attribution rules treat Roger as owning 100% for RMD purposes.
Scenario 2: Spouse Ownership Attribution
Maria and Thomas each own 3% of a manufacturing company employing them both. Neither individually exceeds 5%, but the spousal attribution rule combines their holdings to 6% for each of them. Both Maria and Thomas qualify as more-than-5% owners and must take RMDs from the company 401(k) despite continuing employment at age 73.
Scenario 3: Trust Ownership
James directly owns 4% of his employer corporation. His revocable living trust owns an additional 2%. The trust ownership is attributed to James, bringing his total to 6%. He cannot use the still-working exception even though no single holding exceeds 5%.
The attribution rules apply only in the determination year. A 72-year-old owning 6% who reduces ownership to 3% before turning 73 avoids the 5% owner classification and qualifies for the still-working exception. Strategic planning before the determination year can preserve the ability to defer RMDs.
Account-by-Account Application of RMD Rules While Working
The still-working exception applies only to the specific employer plan where you currently work. Every other retirement account follows normal RMD rules regardless of employment elsewhere.
Traditional IRAs: No Exception Available
Traditional IRAs require RMDs at age 73 regardless of employment status or income level. Working full-time as a corporate executive, part-time as a barista, or earning $500,000 annually makes no difference. The IRA RMD must be calculated and withdrawn by December 31 each year once you reach age 73.
This rule extends to SEP-IRAs and SIMPLE IRAs. These accounts function as IRAs for distribution purposes despite originating from employer contributions. A 75-year-old self-employed consultant with a SEP-IRA must take annual RMDs even while actively running her consulting practice and contributing to the same SEP-IRA.
The traditional IRA exception does not exist because IRAs lack the employer-employee relationship central to the still-working exception. Congress limited the benefit to employer-sponsored qualified plans, treating individual accounts differently under the tax code.
Current Employer’s 401(k): Exception Available
Your current employer’s 401(k) plan qualifies for RMD deferral if you meet all three requirements. A 73-year-old engineer working at Technology Corp can defer RMDs from the Technology Corp 401(k) while continuing employment, provided she owns 5% or less and the plan permits the exception.
This benefit extends to all qualified defined contribution plans at the current employer, including:
- Traditional 401(k) plans
- Profit-sharing plans
- Money purchase pension plans
- Employee stock ownership plans (ESOPs)
The same account can receive ongoing contributions while avoiding RMDs. Employers must continue making matching contributions and allowing salary deferrals for employees over age 73 who are still working. An employee receiving RMD deferrals can simultaneously contribute $30,500 annually (including the $7,500 catch-up for those 50 and older) to the same 401(k) account.
Former Employer’s 401(k): No Exception
Old 401(k) accounts from previous employers require RMDs at age 73 regardless of current employment status. Working at New Company does not defer RMDs from Old Company’s 401(k). The still-working exception applies exclusively to accounts at your current employer.
A 74-year-old teacher working at School District B must take RMDs from her 401(k) at School District A where she worked for 20 years before changing jobs. Employment at School District B is irrelevant to the School District A 401(k). She can defer RMDs from the School District B 403(b) but not from the old account.
This rule creates a common planning opportunity. Many qualified plans allow roll-ins from other qualified plans, permitting you to consolidate old 401(k) accounts into your current employer’s plan before reaching age 73. Once rolled into the current employer’s plan, the entire consolidated balance qualifies for RMD deferral under the still-working exception.
403(b) Plans: Special Rules for Pre-1987 Balances
Public school teachers and nonprofit employees with 403(b) plans can use the still-working exception for post-1986 contributions. However, 403(b) accounts contain a unique complication for long-tenured employees.
Balances contributed before January 1, 1987, follow different distribution rules. These pre-1987 amounts are not subject to age 73 RMD requirements and are not included in calculating RMDs from post-1986 balances. They must be distributed by December 31 of the year you reach age 75 or, if later, April 1 following the calendar year you retire.
A 73-year-old professor still teaching with a 403(b) containing $50,000 in pre-1987 contributions and $450,000 in post-1987 contributions can defer RMDs on the $450,000 but must track the $50,000 separately for the age 75 requirement.
457(b) Plans: Government vs. Non-Governmental
Governmental 457(b) plans permit the still-working exception. A 74-year-old county employee can defer RMDs from his county 457(b) while continuing employment. Non-governmental 457(b) plans sponsored by nonprofit organizations generally follow the same rules as 403(b) plans for RMD purposes.
457(b) RMDs must be calculated and withdrawn separately from other account types. You cannot aggregate 457(b) RMDs with 403(b) or 401(k) RMDs for withdrawal purposes.
Solo 401(k) and Self-Employed Plans: A Different Reality
Self-employed individuals using Solo 401(k), SEP-IRA, or SIMPLE IRA plans face a harsh reality: the still-working exception does not apply to business owners who control more than 5% of their company. Since sole proprietors and single-member LLCs own 100% of their businesses, they cannot avoid this classification.
A 73-year-old self-employed consultant actively running his business and earning $200,000 annually must take RMDs from his Solo 401(k) despite being “still working.” The 5% ownership threshold creates an absolute bar to deferral. This applies even if the business is growing and the owner has no intention of retiring.
The rule extends to husband-and-wife Solo 401(k) plans where spouses collectively own the business. A couple each owning 50% of an LLC both qualify as more-than-5% owners, eliminating the still-working exception for both of them.
Self-Employed Contributions Continue Despite RMDs
Solo 401(k) owners can continue making contributions after age 73 while simultaneously taking RMDs. This differs from the pre-SECURE Act rules that prohibited traditional IRA contributions after age 70½. A self-employed business owner can contribute $30,500 to her Solo 401(k) in 2026 while withdrawing her annual RMD from the same account.
The RMD applies to both traditional and Roth components of the Solo 401(k). Prior to 2024, Roth 401(k) accounts required RMDs despite the tax-free nature of qualified distributions. Beginning January 1, 2024, the SECURE Act 2.0 eliminated RMDs from Roth 401(k) and Roth 403(b) accounts during the owner’s lifetime, aligning them with Roth IRA treatment.
Calculating RMDs and the Impact of Delayed Distributions
The RMD calculation divides your retirement account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table. The life expectancy factor decreases each year as you age, forcing progressively larger withdrawals.
| Age | Life Expectancy Factor | Sample RMD on $500,000 |
|---|---|---|
| 73 | 26.5 | $18,868 |
| 75 | 24.6 | $20,325 |
| 80 | 20.2 | $24,752 |
| 85 | 16.0 | $31,250 |
| 90 | 12.2 | $40,984 |
A 73-year-old with $500,000 in her 401(k) must withdraw at least $18,868. By age 80, if the account has grown to $500,000, the required distribution increases to $24,752 due to the lower life expectancy factor.
The First-Year April 1 Deadline Creates a Double Distribution
Your first RMD can be delayed until April 1 of the year following the year you turn 73 or retire. However, this delay bunches two distributions into one tax year, potentially pushing you into a higher tax bracket.
Marcus turns 73 in 2026 and retires December 15, 2026. His first RMD is due by April 1, 2027, covering the 2026 tax year. His second RMD is due by December 31, 2027, covering the 2027 tax year. If Marcus delays his first RMD until March 2027, he must take two full RMDs in 2027, adding substantial taxable income in a single year.
Most financial advisors recommend taking the first RMD in December of the year you turn 73 or retire to avoid the double distribution. This spreads the tax burden across two years rather than concentrating it in one.
Multiple Account RMD Aggregation Rules
The aggregation rules for calculating and satisfying RMDs vary by account type, creating complexity for individuals with multiple retirement accounts.
Traditional IRAs: Calculate the RMD separately for each traditional IRA, SEP-IRA, and SIMPLE IRA. You can withdraw the total RMD amount from one or more IRAs of your choice. Three IRAs with RMDs of $10,000, $15,000, and $5,000 can be satisfied by withdrawing $30,000 from any one IRA or any combination.
401(k) Plans: Each 401(k) requires a separate RMD calculation and withdrawal from that specific account. You cannot aggregate 401(k) RMDs across different plans. A person with three 401(k) accounts from different employers must take three separate distributions.
403(b) Plans: Follow the IRA aggregation rule. Calculate each 403(b) RMD separately but withdraw the total from one or more 403(b) accounts. However, 403(b) RMDs cannot be aggregated with IRA or 401(k) RMDs.
457(b) Plans: Must be calculated and withdrawn separately from each plan, similar to 401(k) accounts.
Strategic Rollover Planning to Maximize RMD Deferral
The still-working exception creates a powerful planning opportunity through strategic rollovers. By consolidating retirement accounts into your current employer’s 401(k) before reaching age 73, you can defer RMDs on the entire consolidated balance while continuing employment.
Rolling Old 401(k)s Into Your Current Employer’s Plan
Most qualified plans accept rollovers from other qualified plans, allowing you to move old 401(k) money into your current employer’s 401(k). Once the funds transfer, they become part of your current employer’s plan and qualify for the still-working exception.
Critical timing requirement: Complete the rollover before December 31 of the year you turn 73 or retire. If you already owe an RMD from the old 401(k) for that year, you must take that RMD before executing the rollover. The IRS prohibits rolling over an RMD amount.
Sarah, age 72, works at Hospital A and has old 401(k) accounts at Hospital B and Hospital C. In October 2026, she rolls both old accounts into Hospital A’s 401(k). When she turns 73 in 2027, she can defer RMDs on the entire consolidated balance as long as she continues working at Hospital A and meets the other requirements.
Rolling IRAs Into Your Current Employer’s 401(k)
The strategic rollover technique extends to traditional IRAs if your current employer’s plan accepts IRA rollovers. Not all plans permit this, but when available, it converts IRA money that would require RMDs into qualified plan money eligible for the still-working exception.
The IRS allows penalty-free rollovers from traditional IRAs to qualified plans for any reason. A 72-year-old engineer with $800,000 in traditional IRAs and $200,000 in his current employer’s 401(k) can roll the IRA money into the 401(k) in 2026. When he turns 73 in 2027, the entire $1 million balance avoids RMDs while he continues working.
Important limitations:
- Only pretax IRA funds can roll into a 401(k). After-tax IRA contributions and Roth IRA money cannot be rolled into traditional 401(k) plans.
- The receiving plan must explicitly permit IRA rollovers in its plan document.
- Once inside a 401(k), the funds follow 401(k) distribution rules, which may be more restrictive than IRA rules.
Common Mistakes That Trigger Unexpected RMDs
Mistake 1: Assuming Part-Time Work Disqualifies You
Many workers reduce to part-time hours as they transition toward retirement, incorrectly believing part-time status eliminates the still-working exception. The IRS has never established minimum work hours to qualify as “still working.”
A 73-year-old retail manager reducing from 40 hours weekly to 15 hours weekly continues qualifying for the exception. A university professor teaching one class per semester remains employed. A nurse working two 12-hour shifts monthly maintains employment status. The key is the employment relationship, not the hours.
The consequence of this misunderstanding is unnecessary RMDs. Individuals correctly qualifying for deferral instead take distributions, pay taxes, and lose the opportunity for continued tax-deferred growth.
Mistake 2: Missing the 5% Ownership Attribution
Business owners who reduce direct ownership below 5% while family members retain ownership often incorrectly believe they escape the 5% owner restriction. The family attribution rules aggregate holdings from spouses, children, parents, and grandparents.
James reduces his company ownership from 20% to 4% at age 72, planning to defer RMDs when he turns 73. However, his daughter owns 25% of the same company. The attribution rules treat James as owning 29% (his 4% plus his daughter’s 25%), permanently classifying him as a more-than-5% owner.
The consequence is mandatory RMDs despite continuing employment. The mistake often goes undetected until the IRS questions missing distributions during an audit, potentially years later.
Mistake 3: Retiring December 31 Instead of January 1
The IRS treats a final work day of December 31 as retirement in that calendar year, not the following year. This seemingly minor timing detail can accelerate RMD requirements by a full year.
Linda plans to retire at the end of 2026 after turning 73 earlier that year. If her final work day is December 31, 2026, she retired in 2026 and must take her first RMD by April 1, 2027. If instead she works January 2, 2027, even for a single day, her retirement year becomes 2027, delaying the first RMD until April 1, 2028.
Mistake 4: Forgetting About Former Employer 401(k)s
Individuals using the still-working exception for their current employer’s plan often forget that old 401(k) accounts at previous employers remain subject to normal RMD rules. The deferral applies only to the current employer’s plan, creating a common oversight.
Michael, age 74, works at Corporation X and successfully defers RMDs from his Corporation X 401(k). He also maintains a 401(k) at Corporation Y where he worked until five years ago. The Corporation Y 401(k) requires annual RMDs despite Michael’s continued employment at Corporation X. Missing these RMDs triggers the 25% penalty on the shortfall amount.
Mistake 5: Failing to Verify Plan Document Language
Not all retirement plans adopt the still-working exception. Some plan sponsors require all participants to begin RMDs at age 73 regardless of employment status. Assuming your plan includes the exception without verification can result in missed required distributions.
Request written confirmation from your plan administrator. The Summary Plan Description should explicitly state whether the still-working exception applies. If the plan does not allow the exception, your only options are taking RMDs or leaving employment to preserve the deferral.
The RMD Penalty Structure and Correction Process
Missing an RMD triggers immediate tax consequences. The SECURE Act 2.0 reduced the penalty from 50% to 25% of the amount not withdrawn, effective January 1, 2023. The penalty further reduces to 10% if you correct the shortfall within two years.
A 73-year-old owing a $20,000 RMD who takes only $12,000 faces a $2,000 penalty on the $8,000 shortfall (25% of $8,000). If she withdraws the missing $8,000 within two years and properly reports the correction, the penalty drops to $800 (10% of $8,000).
Correcting Missed RMDs Through IRS Form 5329
The IRS often waives RMD penalties entirely when individuals self-report errors and take prompt corrective action. Form 5329 provides the correction mechanism for requesting penalty relief.
Step 1: Withdraw the Full Missed Amount Immediately
Calculate the correct RMD you should have taken and withdraw that exact amount as soon as you discover the error. Speed matters because the IRS views prompt correction as evidence of reasonable error rather than willful avoidance.
Step 2: Complete Form 5329 for Each Affected Year
Form 5329 must be filed for each tax year you missed an RMD. If you missed RMDs in 2024, 2025, and 2026, prepare three separate forms using the version of Form 5329 corresponding to each year.
Critical form entries:
- Line 52: Enter the total RMD you should have withdrawn
- Line 53: Enter the amount you actually withdrew
- Line 54: Enter the percentage used to calculate the penalty (25%)
- Line 55: Enter $0 when requesting a penalty waiver
Entering zero on Line 55 signals your request for penalty waiver. You do not need to pay the penalty upfront while requesting the waiver.
Step 3: Attach a Penalty Waiver Letter
Include a brief letter explaining why you missed the RMD and the steps taken to prevent future errors. The IRS accepts various reasonable explanations including:
- Confusion about whether the still-working exception applied
- Incorrect advice from a financial institution or advisor
- Serious illness or family medical emergency
- Administrative error or lack of notification from the plan
- Misunderstanding of which accounts required RMDs
The letter should demonstrate good faith effort to comply with tax rules and acknowledge responsibility for the error.
Step 4: Provide Supporting Documentation
Attach evidence that you withdrew the missed RMD, such as:
- Account statements showing the withdrawal
- Copies of checks received
- Distribution confirmations from the plan administrator
The documentation proves you corrected the error, strengthening your waiver request.
Statute of Limitations on RMD Penalties
Before the SECURE Act 2.0, the IRS faced no statute of limitations for assessing RMD penalties unless you filed Form 5329. The new law established a three-year statute of limitations for traditional IRA RMD penalties starting with 2022 tax returns.
The statute begins running on April 15 following the tax year or the actual filing date if you filed with an extension. For 2023 tax returns filed by April 15, 2024, the IRS has until April 15, 2027, to assess penalties for missed 2023 RMDs. If you substantially understate the penalty by 25% or more, the statute extends to six years.
Critical limitation: The three-year statute applies only to traditional IRA RMD penalties, not employer-sponsored plan penalties like 401(k), 403(b), or 457(b) accounts. Missed employer plan RMDs face no statute of limitations, allowing the IRS to assess penalties indefinitely unless you file Form 5329.
Scenarios: How the Still-Working Exception Operates
Scenario 1: Corporate Employee with Multiple Accounts
| Situation Details | RMD Requirement |
|---|---|
| Janet, age 74, works part-time (20 hours weekly) at Tech Corporation | No RMD from Tech Corporation 401(k) while employed |
| Owns 2% of Tech Corporation stock | Qualifies as non-5% owner – exception applies |
| Has traditional IRA with $400,000 balance | Must take annual RMD from IRA |
| Has 401(k) at Previous Employer with $200,000 | Must take annual RMD from old 401(k) |
| Tech Corporation 401(k) balance: $600,000 | Can defer this entire balance while working |
Janet must calculate three separate RMDs annually. Her traditional IRA requires an RMD based on the $400,000 balance. Her old employer 401(k) requires a separate RMD on $200,000. Only her current Tech Corporation 401(k) qualifies for deferral. She could eliminate two of these RMDs by rolling her IRA and old 401(k) into her current Tech Corporation 401(k) before year-end, assuming the plan accepts such rollovers.
Scenario 2: Family Business Owner Navigating Attribution Rules
| Situation Details | RMD Requirement |
|---|---|
| Michael, age 73, works full-time at Family Manufacturing LLC | Must take RMD despite employment |
| Directly owns 3% of the company | Below 5% threshold individually |
| Wife owns 4% of the company | Spousal attribution applies |
| Combined attributed ownership: 7% | Treated as more-than-5% owner |
| Cannot use still-working exception | Mandatory RMDs begin at age 73 |
Michael’s mistake was failing to recognize that spousal attribution would combine his 3% with his wife’s 4% to create 7% attributed ownership for each of them. Had they maintained combined ownership at 5% or less before Michael’s determination year, he could have qualified for the still-working exception. Once classified as a more-than-5% owner in the determination year, this status becomes permanent even if they later reduce ownership.
Scenario 3: Government Employee with 403(b) and 457(b) Accounts
| Situation Details | RMD Requirement |
|---|---|
| Patricia, age 75, teaches at State University | Still employed, qualifies for exception |
| 403(b) balance: $800,000 (all post-1986 contributions) | No RMD while employed at State University |
| 457(b) balance: $300,000 | No RMD while employed at State University |
| Traditional IRA balance: $250,000 | Must take annual RMD |
| Both plans allow still-working exception | Exception applies to both accounts |
Patricia benefits from the still-working exception for both her 403(b) and 457(b) despite their different plan types. However, her traditional IRA requires annual RMDs regardless of employment. She could roll the IRA into her 403(b) if the plan permits IRA rollovers, eliminating all RMDs while she continues teaching.
Mistakes to Avoid When Using the Still-Working Exception
Assuming the exception applies to all retirement accounts. The deferral applies exclusively to your current employer’s qualified plan, not to IRAs or former employer plans. Neglecting RMDs from these other accounts triggers penalties.
Failing to check plan document language. Not all plans adopt the still-working exception despite IRS permission to do so. Taking no distributions based on incorrect assumptions creates penalty exposure when the plan requires RMDs at age 73.
Ignoring the determination year timing. The 5% ownership test occurs only in the plan year ending in the calendar year you reach age 73. Reducing ownership after this determination year cannot change your classification. Planning must occur before the determination year.
Overlooking family attribution rules. Counting only your direct ownership while ignoring spouse, children, parent, or grandparent holdings leads to incorrect conclusions about whether the 5% threshold applies. The attribution rules operate automatically without requiring family members to be plan participants.
Retiring on December 31 instead of January 1. This timing error accelerates your first RMD by an entire year, bunching more taxable income into fewer years and potentially increasing tax brackets and Medicare premiums.
Rolling over accounts during the year you owe an RMD. The RMD must be withdrawn before executing a rollover. Rolling over funds that include the RMD amount creates an excess contribution requiring correction.
Continuing as an independent contractor instead of employee. Transitioning from employee to 1099 contractor ends the employment relationship necessary for the still-working exception even if you perform the same work for the same company.
Pros and Cons of Deferring RMDs Through Continued Employment
Pros of Using the Still-Working Exception
Extended tax-deferred growth. Money remaining in the retirement account continues growing without tax consequences. A 73-year-old deferring a $25,000 RMD keeps that amount invested for potentially another decade or more, allowing continued compounding.
Lower current tax burden. Avoiding forced withdrawals reduces current taxable income, potentially keeping you in a lower tax bracket and reducing Medicare Part B and Part D premium surcharges that apply when modified adjusted gross income exceeds certain thresholds.
Flexibility in retirement account structure. Consolidating old retirement accounts into your current employer’s plan simplifies account management while extending RMD deferral across your entire retirement savings.
Continued retirement contributions. Employers must continue matching contributions and permitting salary deferrals for employees over age 73 who remain employed, allowing simultaneous contributions and RMD deferral.
Protection from market downturns. Deferring RMDs during market declines prevents selling depreciated investments to satisfy distribution requirements, preserving more shares for future appreciation.
Cons of Using the Still-Working Exception
Larger future RMDs. Delaying distributions allows accounts to grow larger, resulting in higher required distributions when you eventually retire. A larger account balance divided by a smaller life expectancy factor creates potentially enormous RMDs.
Higher future tax brackets. Bunching years of deferred RMDs into retirement can push you into higher tax brackets than if you had spread distributions across more years while working.
Increased Medicare premium surcharges. Large RMDs increase modified adjusted gross income, triggering Income-Related Monthly Adjustment Amounts that can add hundreds of dollars monthly to Medicare Part B and Part D premiums.
Loss of Roth conversion opportunities. Working income already fills lower tax brackets, making Roth conversions less attractive. Taking RMDs while working might enable converting some funds to Roth accounts in years with lower income.
Complexity in account management. Maintaining multiple accounts with different RMD requirements increases the risk of errors and missed distributions. Consolidation requires careful planning and execution.
Frequently Asked Questions
Can I take RMDs monthly instead of once annually?
Yes. You can structure RMDs as monthly, quarterly, or periodic withdrawals throughout the year. The IRS requires only that the total amount withdrawn by December 31 meets or exceeds your calculated RMD. Many retirees prefer monthly distributions to simulate regular paychecks.
Does working part-time qualify for the still-working exception?
Yes. No minimum hours requirement exists for the still-working exception. As long as your employer treats you as an employee for tax and payroll purposes, you qualify regardless of whether you work 40 hours weekly or 5 hours monthly.
Can I roll my IRA into my current employer’s 401(k) to avoid RMDs?
Yes, if the plan permits. Many 401(k) plans accept rollover contributions from traditional IRAs. Once rolled into your current employer’s plan, the funds become eligible for the still-working exception, eliminating RMDs while you remain employed.
What happens if I own exactly 5% of my employer?
You qualify for the still-working exception. The IRS defines a 5% owner as someone owning MORE than 5%. Owning exactly 5% does not trigger the ownership restriction, allowing you to defer RMDs while working.
Do RMDs apply to Roth 401(k) accounts if I’m still working?
No, starting in 2024. The SECURE Act 2.0 eliminated RMDs from Roth 401(k) and Roth 403(b) accounts during the owner’s lifetime. However, Roth IRAs never had RMD requirements for the original owner.
Can I satisfy RMDs from multiple IRAs by withdrawing from just one?
Yes. Calculate the RMD separately for each traditional IRA, then withdraw the total amount from one IRA or any combination of IRAs. However, this aggregation rule does not apply to 401(k) accounts, which require separate withdrawals from each plan.
What if my plan administrator automatically distributes my RMD?
No. Many plan administrators automatically process RMDs for participants over age 73. Contact your administrator in writing to confirm the still-working exception applies and request suspension of automatic distributions. Obtain written confirmation before December 1 each year.
Does the still-working exception apply to inherited retirement accounts?
No. Inherited retirement accounts follow different distribution rules that generally require complete distribution within 10 years of the original owner’s death, regardless of the beneficiary’s age or employment status.
Can I return an RMD if I took it by mistake?
Possibly, within 60 days. The IRS permits one 60-day rollover per 12-month period. If you mistakenly withdrew an RMD from your current employer’s 401(k) while qualifying for the still-working exception, you might be able to roll it back within 60 days.
What if I turn 73 mid-year and retire later that same year?
You must take an RMD. Reaching age 73 at any point during the year triggers the RMD requirement for that year unless you remain employed through December 31. Retiring after your birthday but within the same year means you retired during your age-73 year.
Does the still-working exception apply to SEP-IRAs and SIMPLE IRAs?
No. SEP-IRAs and SIMPLE IRAs are treated as traditional IRAs for distribution purposes, requiring RMDs at age 73 regardless of employment status. Only employer-sponsored qualified plans like 401(k), 403(b), and 457(b) accounts qualify for the exception.
Can I use the still-working exception if I’m a 5% owner but sell my stake?
Only if you sell before your determination year. Reducing ownership to 5% or less before the plan year ending in the calendar year you reach age 73 allows you to qualify. Selling after that year does not change your permanent classification.
Related reading
- Do 401(k) Plans Really Require RMDs? – Avoid This Mistake + FAQs
- Do Defined Benefit Plans Have RMD? (w/Examples) + FAQs
- Are RMDs Required for Inherited IRAs? (w/Examples) + FAQs
- What Happens if You Don’t Take the RMD? (w/Examples) + FAQs
- Do I Take an RMD From Each Retirement Account Separately? (w/Examples) + FAQs
- Are RMDs Required for Annuities? (w/Examples) + FAQs
- Can a 72(t) Bridge You to Age 59½? (w/Examples) + FAQs