What Is the Still-Working Exception?

The Still-Working Exception is a provision that allows employees who are still working beyond the standard required minimum distribution (RMD) age (currently 73) to delay taking RMDs from their employer-sponsored retirement plans, such as a 401(k). To qualify, the individual must be actively employed by the company sponsoring the plan and cannot own more than 5% of the company. The exception applies only to the retirement plan of the current employer, allowing workers to defer RMDs until April 1 of the year following their retirement.

Criteria for Eligibility:

• Age: The individual must be over the standard RMD age (73 starting in 2023).
• Employment Status: The individual must be actively employed by the company sponsoring the retirement plan. Retirement or part-time work typically disqualifies a person from using this exception.
• Ownership Stake: The individual cannot own more than 5% of the company. Owners with significant stakes in a company are required to start RMDs at the traditional RMD age, regardless of employment status.

How the Still-Working Exception Works

The Still-Working Exception is applied on a plan-by-plan basis. If an individual qualifies, they can delay taking RMDs from that specific employer-sponsored retirement plan until April 1 of the year following their retirement.

Example:

Suppose an individual named John turns 73 in 2024 and is still working full-time for XYZ Corporation, which sponsors his 401(k). John does not own more than 5% of XYZ Corporation. Under the Still-Working Exception, John is not required to take RMDs from his 401(k) with XYZ Corporation until April 1 of the year after he retires. However, if John has a traditional IRA or a 401(k) from a previous employer, he must start taking RMDs from those accounts once he turns 73.

Benefits of the Still-Working Exception

The Still-Working Exception offers several benefits for employees who continue working past the standard RMD age:

1. Tax Deferral

By delaying RMDs, individuals can continue to defer taxes on their retirement savings. This allows the account to grow tax-deferred for a longer period, which can be particularly advantageous if they are still in a high tax bracket due to their employment income.

2. Income Control

For individuals who don’t need the money immediately, the Still-Working Exception provides flexibility in controlling their taxable income. Postponing RMDs can reduce their annual taxable income, potentially allowing them to stay in a lower tax bracket until they are ready to retire.

3. Maximizing Retirement Savings

Employees can continue contributing to their employer-sponsored retirement plans while deferring RMDs. This can be beneficial for individuals who want to build a larger nest egg before fully retiring.

4. Simplicity

The Still-Working Exception can simplify retirement planning by reducing the number of accounts an individual needs to take RMDs from while still working. They can focus on other aspects of their financial plan until they retire.

Limitations and Considerations

While the Still-Working Exception can be beneficial, it is not without limitations and potential complications. Here are some key factors to consider:

1. Plan-Specific Rules

Not all employer-sponsored retirement plans offer the Still-Working Exception. Some employers may require employees to begin taking RMDs at the standard age, regardless of their working status. It's essential to check with the plan administrator to confirm whether this exception is available.

2. Ownership Rules

If an individual owns more than 5% of the company they work for, they are required to begin taking RMDs at the standard age (currently 73). This rule applies even if they are still working for the company, which can be a surprise for small business owners or employees with equity stakes.

3. Other Retirement Accounts

The Still-Working Exception only applies to the employer-sponsored retirement plan of the company the individual is currently employed by. If the individual has IRAs or retirement plans from previous employers, they will still be required to take RMDs from those accounts once they reach the RMD age.

4. Delayed RMDs After Retirement

Once the individual retires, they must begin taking RMDs by April 1 of the following year. This could result in a situation where they need to take two RMDs in one year: one by April 1 (for the year they retired) and another by December 31 (for the current year). This can lead to a larger tax bill in that year.

5. Investment Strategy

Deferring RMDs can extend the tax-deferred growth of the retirement account, but it’s essential to maintain an appropriate investment strategy during this extended period. The individual should review their asset allocation to ensure it aligns with their long-term financial goals and risk tolerance.

How to Apply the Still-Working Exception

To take advantage of the Still-Working Exception, individuals must communicate with their employer's retirement plan administrator. Here's a step-by-step guide to applying the exception:

1. Check Plan Eligibility: Confirm with the plan administrator whether the employer-sponsored retirement plan allows for the Still-Working Exception. Not all plans offer this provision, and some may have different rules.
2. Verify Ownership Percentage: Ensure that you do not own more than 5% of the company. If you own more than 5%, the exception will not apply, and you will need to start taking RMDs at the standard age.
3. Continue Working Full-Time: The Still-Working Exception applies only if you are actively employed by the company. Retiring, cutting back to part-time hours, or leaving the company will trigger the need to begin RMDs.
4. Monitor Retirement Status: Once you retire, you will need to start taking RMDs. It's important to plan ahead for this, as the timing of your retirement can impact the size of your RMDs and your tax bill.

Special Considerations for Small Business Owners

One key point to remember is that small business owners may not qualify for the Still-Working Exception, even if they are still actively working. This is because of the 5% ownership rule. For example, if you own a small business and have a 401(k) plan through that business, you are considered to own more than 5% of the company, and you will be required to start taking RMDs at the standard age.

The Bottom Line

The Still-Working Exception is a useful provision for individuals who continue working past the standard RMD age, allowing them to delay RMDs from their current employer’s retirement plan. This can provide tax advantages, help manage income, and allow for continued retirement savings. However, the exception is subject to plan-specific rules and is not available to business owners with more than 5% ownership. It’s crucial to understand the details of your retirement plan, verify your eligibility, and consider how the timing of your retirement may impact your RMD obligations.