If you’re still working and approaching the great old age of 70, you may be wondering about the “Minimum Required Distribution” (RMD) that you will need to take each year to avoid IRS penalties. One thing many people don’t realize is that IRAs are treated differently than 401K plans. Are you financially hurt, don’t need the money, and don’t expect to be forced to take an unwanted RMD from your retirement account? You may want to delay those distributions if possible. You may have heard of the “Keep Working” exception, which can allow RMDs to be postponed, but aren’t sure how it works or what it applies to.
The exception that still works does not apply to IRA accounts. Only applies to business plans. If you’re still working, that can’t help you delay RMDs from your IRA plans unless your company allows IRA rollovers to your 401K. Also, unfortunately, the exception will only apply to the company you are still working for. If you have investments in other company 401K plans, you still have to take RMDs from them. Also, your plan may not allow “Still Working” to be used and may require you to take required minimum distributions even though you are still working for them. They are not required to force you to take RMDs from the IRS, but some plans do so on their own. Let’s hope yours doesn’t. If the “Still in Operation” exception is used, RMDs begin in the year you separate from service. The required start date is April 1 of the year following separation from service.
Delaying RMD may seem like a great idea if you have other investments and liquidity, but it’s not always the best idea. You may be locked into company stock or have a limited range of investments in the company plan compared to an IRA or take the money and invest it yourself. People who’ve invested entirely in Enron stock in their 401k know that a lifetime of retirement can go up in smoke if you focus on one thing. Taxes are also a concern. Yes, delaying an RMD delays the IRS payment, but unless you plan to work forever, at some point you will have an RMD and it will be larger since you will have a shorter life expectancy. That means more taxes in the future. If you die, your beneficiary will have an RMD even if they are under the age of 70.
One final caveat, if you own 5% or more of your company, you must take required distributions even if you still work there. This may also include the property interests of other family members.
This decision about RMDs can be important. A CFP, Certified Financial Consultant, Certified Public Accountant or Enrolled Agent should be consulted if you are not sure what to do.