If you contribute to a tax-advantaged retirement account at work or a traditional IRA, Required Minimum Distributions (RMDs) are something you’ll need to factor into your financial plan. These distributions are minimum amounts you’re required to withdraw from your retirement accounts once you reach age 72. You might be wondering whether you have to take RMD if still working. The answer is usually yes, though there are some exceptions. For a full understanding of how this rule impacts your personal situation, you could speak with a financial advisor.
What Are Required Minimum Distributions?
Required Minimum Distributions are minimum amounts you’re required to withdraw from certain types of tax-advantaged accounts beginning at age 72. If you have any of the following accounts, you’re subject to RMD rules as established by the Internal Revenue Code:
- 401k plans (traditional and Roth)
- 403b plans
- 457 plans
- Profit-sharing plans
- Traditional IRAs
- IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs
The only plan not included on this list is a Roth IRA. The amount you’re required to withdraw in RMDs depends on the balance in your account and your life expectancy. The IRS publishes life expectancy tables that can help you calculate the amount you’re required to withdraw.
Failing to take RMDs on time can result in a significant tax penalty. Specifically, if you fail to take an RMD as scheduled, or withdraw less than the required amount, any amount not withdrawn is subject to a 50% tax penalty. The IRS does allow for a waiver of the penalty if you can show that your failure to withdraw the money as directed was due to a reasonable error and you’re taking steps to correct it.
Is It Required To Take An RMD If You’re Still Working?
The simple answer is to if you need to take an RMD if you’re still working is, “It depends.” For most people, retirement comes earlier than age 72. But if you’re planning to work longer, either out of necessity or simple preference, it’s important to know what that means where RMDs are concerned. So can you delay your RMD if still working? It depends on a few things.
If you’re working past age 72 and you have money in a traditional IRA, then you still have to take the required minimum distributions as scheduled. Failure to do so could result in the aforementioned 50% tax penalty. But you could put off taking RMDs from an employer-sponsored retirement plan or small business retirement plan if you:
- Are still working
- Do not own more than 5% of the business you work for
- Have an employer-sponsored retirement account with the business you work for
If you can check off all three of those boxes, then you can delay taking RMDs from your account until April 1 of the year after you retire or leave your employer. That can get tricky, however, since your second RMD must be taken by December of that same year. So you could be doubling up on RMDs initially.
The IRS doesn’t specify how many days or hours you need to work during the year to qualify for an exception to RMD rules. But your plan might so it’s important to understand what requirements if any, you need to meet to count as employed for the year.
Should You Delay RMDs?
Delaying required minimum distributions from your workplace plan has its advantages. For one thing, it allows you to continue growing your retirement savings on a tax-deferred basis.
With 401k plans, 403b plans and 457 plans, your savings aren’t taxed until you withdraw the money in retirement. So if you plan to work indefinitely, you can put off paying taxes on the earnings in your account until you’re ready to use the money under RMD exception rules. You can also continue making contributions to your plan past age 72 and beyond as long as you’re working.
Remember, those rules only apply to workplace plans, not traditional IRAs or IRAs for business owners and self-employed individuals If you have this type of IRA, you can’t avoid the requirement to begin taking money out at age 72. And you can no longer make new contributions to a traditional IRA past age 72.
If you’re considering putting off your RMDs, it may help to talk to your financial advisor or a tax planning expert first. They can advise you when to take RMDs, based on your intended retirement date, in order to avoid the possibility of triggering a tax penalty or having to double up on distributions in the same year.
Can You Avoid RMDs After Retirement?
If you have a workplace plan and you’re worried about the tax bite associated with RMDs, there is one potential solution. You could roll savings from your traditional 401k, 403b or 457 plan into a Roth IRA when you retire.
This is something your plan custodian can handle on your behalf. The custodian can move money from your 401k into a Roth IRA via a direct rollover. There is, however, a caveat. Rolling money from a traditional employer-sponsored retirement plan to a Roth IRA means you’ll have to pay income tax on the distribution.
The good news is that you only pay this tax in the year that you complete the rollover. Going forward, any distributions from your Roth IRA would be tax-free. You could leave the money in your Roth as long as you want and if you have earned income, you could continue making contributions regardless of age.
There is one other possibility for avoiding RMD taxes. The IRS allows you to make qualified charitable distributions using RMD money. The contribution has to be $100,000 or less and rolled out of an IRA directly to an eligible charity. But if you can meet those requirements, you’ll owe no taxes on the distribution.
Keep in mind that you can’t also claim a deduction for charitable deductions on your taxes if you decide to use RMD money in this way. The IRS has strict rules to prevent double-dipping on these kinds of tax breaks.
The Bottom Line
Whether you need to take an RMD if still working depends on the type of account you have. If you only have a traditional IRA, then you’d need to plan for RMDs beginning at age 72, regardless of whether you’re working or not. If you have a workplace plan, on the other hand, you may be able to leave your savings intact a little longer before RMDs become required.
Retirement Planning Tips
- Consider talking to a financial advisor about when it makes sense to begin taking required minimum distributions and how you might be able to delay them if you plan to work beyond age 72. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Inheriting an IRA can add a wrinkle to your tax planning. When someone inherits an IRA who passed away before he or she was required to begin taking RMDs, they have two avenues for withdrawing the money. Read about tax implications when inheriting an IRA.
- If you’re trying to avoid RMD and have decided to roll over your funds out of an IRA into another account, first check out our mistakes to avoid.
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