Take-Away: Some folks who continue to work beyond their required beginning date (RBD-age 73) may not have to take any required minimum distribution (RMD) until they actually retire. However, that ability to delay taking RMDs is subject to a few rules that need to be met.

Background: If a qualified plan sponsor formally elects this option for its plan, an employee-participant who is still working after reaching his/her required beginning date (RBD) can avoid taking any required minimum distributions (RBDs) until that employee- participant actually retires. If they own an IRA ‘outside’ of their qualified plan account, they must still take an RMD from their IRA prior to December 31 of the year in which they turn age 73.

Conditions: There are a couple of preconditions to be met to exploit this delay in taking RMDs, which are: (i) the employee-participant does not own 5% or more of the employer-sponsor (which is subject to an aggregation-of-ownership rule for other family members or spouses who own an interest in the employer-sponsor); and (ii) the less-than-5%-ownership rule must be satisfied prior to the employee’s actual RBD- stock in the sponsor cannot be gifted after the RBD in order to meet the 5%-or-less ownership condition.

Still Working Amount: Surprisingly, neither the Tax Code nor its Regulations prescribe the amount of time the participant-employee must work to constitute still working. Presumably an employee-participant who works one day a week would meet the still working requirement and be able to delay taking any RMDs while they still work one day a week.

When RMDs Start: However, just like any other IRA owner or retired plan participant, once they become subject to the RMD rules, the now-retired-still-working plan participant must take their first RMD prior to December 31 of the year in which they actually retire. And just like an IRA owner who turns 73 and is then subject to taking RMDs, the now-retired-still-working plan participant has until April 1 of the following calendar year in which to take his/her first RMD, but then they are required to take a second RMD in the same calendar year, which leads to taking two RMDs and bunching taxable income into a single calendar year.

Example: Bob, age 80, was still working at the start of 2023. Bob participated in his employer’s 401(k) plan. Bob plans to retire during 2023. Bob intends to rollover his 401(k) balance to an IRA upon his retirement. Bob must take an RMD in 2023 since he retired in 2023 and he is no longer still working on December 31, 2023. Bob’s first RMD amount will be based on Bob’s December 31, 2022 401(k) balance. Bob, who retired during 2023, can delay taking this first RMD until April 1, 2024. However, Bob will then have to take his second RMD from his now-funded IRA by the end of December 31, 2024; Bob’s second RMD will be based on his December 31, 2023 IRA balance. Consequently, Bob’s delay in taking his first RMD until April 1, 2024 will be supplemented by his second RMD taken no later than December 31, 2024, thus pushing Bob’s 2024 taxable income into a higher marginal federal income tax bracket.

If Bob decides to rollover his 401(k) balance to an IRA sometime during  2023, that decision will have an impact on when Bob’s first RMD must be taken. The retirement account distributions rules clearly require that the RMD for the year must be taken before any rollover of the account balance to an IRA can occur. Consequently, Bob would need to take his first RMD in 2023 before his rollover to his IRA could be accomplished. Bob would then have to take an RMD from his IRA by December 31, 2024.

If Bob waits until January 2, 2024 to retire, his first (and only) RMD for 2024 must be taken before December 31, 2024.

Conclusion: The still working exception to the RMD rule is not as well known as you might expect. Often if the worker has an IRA ‘outside’ of their 401(k) account they confusingly misapply the RMD rule to their 401(k) account along with their IRA, when only RMDs from the IRA must be taken. But, as noted, the qualified plan must formally elect to permit a plan participant who is still working  to delay taking their RMD from their qualified plan account if the participant continues to work beyond their RBD.