RMD Still Working Exception

by Craig Moser on October 6, 2017

Required minimum distributions (RMDs) are a fact of life for most retirement account owners once they reach age 70 ½.  However, if you fit the definition, you may be able to delay RMDs thanks to the RMD Still Working Exception.  When you finally decide to throw in the towel and begin your well-earned retirement, RMDs begin.  At this point, you need to proceed with caution.  You don’t want to start your golden years with a 50% penalty on RMDs you didn’t take.  To help you better understand, let’s take a look at RMDs and the “still working” exception.


RMD Still Working Exception

If you have a company retirement plan, the required beginning date for RMDs is April 1st of the year following the year you reach age 70 ½.  However, if you don’t own more than 5% of the company and your plan allows, you can delay your RMD to April 1st of the year following the year you actually retire.  This is the “still working” exception.  It only applies to RMDs from the employer-sponsored plan(s) of an employer you are currently working for, but doesn’t apply to IRAs.  In addition, the exception doesn’t apply to employer plans if you aren’t currently working for that company.

Be aware the “still-working” exception isn’t available in all plans.  Check you individual plan to see if the exception is available to you.


RMDs Begin the Year You Retire

When you finally retire,  you must take an RMD April 1 of the year following your retirement.  This is true no matter how late in the year you retire.

Example: Pedro, age 75, is still working for a company.  He does not have to take RMDs from the company plan until April 1 of the year after he retires.  Pedro decides to retire December 1, 2016.  Pedro must take an RMD for 2016.  He has until April 1, 2017 to take the RMD.


Rolling Over to an IRA

Once retired, rolling a company plan to an individual IRA is a little complicated.  In this situation, your RMD is always the first money to leave your retirement account, and it cannot be rolled over.  After the RMD is taken, money remaining in your retirement account can then be rolled to your IRA.

You don’t need to take a RMD from your IRA for the year of the rollover.  You take the RMD on those funds the following year.

Example: Pedro from our previous example, decides he would like to do a direct rollover to a newly established IRA from his company plan upon retirement in 2016.  Pedro must take his RMD in 2016 prior to rolling over the remainder of his plan balance.  Even though his required beginning date is April 1, 2017, because he is taking a distribution from the plan in 2016, his 2016 RMD will be the first money out.  He does not need to also take an RMD from his IRA for 2016.  In 2017, he will need to take an RMD from the IRA.


Professional Advice

The rules can be complex.  Consult a knowledgeable tax advisor.

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