Still Working Rule Can Delay RMDs
Generally, taxpayers that are participants in qualified retirement plans are required to start taking required minimum distributions (RMDs) from the plan no later than April 1 of the year after which they reach the mandatory distribution age.
Still Working Exception
However, there is an exception that applies to certain plan participants who are still working. An employee's RBD (required beginning date) for receiving distributions from a qualified plan is April 1 of the year following the later of the calendar year the employee:
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Reaches age 72 (70½ prior to 2020) or
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The calendar year in which they retire from employment with the employer maintaining the plan.
Caution
The employer’s plan may require the retirement plan participant to begin RMDs under the normal rules, in which case the taxpayer cannot take advantage of the “still working“ exception.
Caution
The above rule does not apply to distributions from IRAs (including those established in conjunction with a SEP or SIMPLE IRA plan) and distributions from qualified plans to more-than-5% owners.
When Does Retirement Begin?
A taxpayer retires in a given calendar year unless he works at least one day in the following year! A taxpayer who is older than the mandatory distribution age, who is laid off in a given year by the employer, must begin RMDs from that employer’s retirement plan in the next calendar year.
Only Applies to Current Employer
The “still working” exception only applies to retirement plans of the taxpayer’s current employer. RMDs from other plans and IRAs cannot be delayed under the “still working” exception.
Part-Time Employment
The IRS has taken no official position on this issue of what constitutes part-time employment for this purpose. So, it seems that if a person is considered to be an employee under the Code, that person is "still working" for the purpose of the still-working exception (even if the ongoing work is part time).
Possible Strategy
Where the employer’s qualified plan permits, the employee could roll other taxable qualified pension amounts and IRAs into the employer’s qualified plan, thus potentially delaying the RMDs from these other plans also. HOWEVER, the rollover must be completed in a year before the employee reaches the mandatory distribution age – otherwise the regular RMD requirements will kick in for those accounts.
Only pre-tax dollars can be rolled into an employer’s plan so care must be taken not to roll non-deductible contributions into the employer’s plan. However, any non-deductible contributions left behind can be withdrawn without any taxability or converted to a Roth IRA with little or no tax liability and avoid any RMD requirements on those funds as well.
Final Word
Care should be taken to review the provisions of the employer’s plan to ensure there are no detrimental provisions related to the “still working” provision, the treatment of rollover funds and the accessibility to funds in case of an unexpected need.
Also keep in mind the taxpayer may have larger RMDs the longer the distributions are delayed, which could mean higher tax brackets or more of their Social Security benefits becoming taxable, just to mention a couple of the potential disadvantages.