Have you ever asked the age of a young child whose fifth birthday is in his rear view mirror? Because that child eagerly looks forward to attaining the age of 6 years old, she may tell you she is 5 and a half. As you and I get older, the Internal Revenue Service (“IRS”) becomes also interested in our age plus 6 months. When you and I approach our birth date signifying 3 score and 10 years on this earth, not only do our loved ones become excited, but also our financial and tax advisors start talking about that big birthday plus another 6 months.
Why this concern with the extra 6 months? Congress decided years ago that each of us should not be able to accumulate too much in our retirement accounts. To cure this, Congress mandated that participants in qualified retirement plans begin taking Required Minimum Distributions (“RMD”) by a “Required Beginning Date” (“RBD”). For qualified pension and profit-sharing plans, an employee’s RBD for receiving distributions is April 1 of the year following the later of the calendar year in which the employee
1. Reaches age 70 ½ or
2. Under the “still working” exception, retires from employment with the employer maintaining the plan.
While those of us with Individual Retirement Accounts (“IRA”) (and those accounts established in conjunction with a SEP or SIMPLE IRA plan) also have a RBD of April 1 of the year following the year in which we reach age 70 ½, the “still working” exception listed above does not apply. The exception would also not apply to distributions from qualified plans to owners of more than 5% of the company maintaining the plan for the plan year ending within the calendar year that one reaches the age of 70 ½.
If you are still working past age 70 ½ with the same company which has the retirement account (and you are not above 5% ownership in the company), you can delay the RBD to April 1 of the year following retirement. You should check with your company/employer’s plan since some plans require that RMD’s begin before the Tax Code-provided RBD. If that is the case, you become unable to take advantage of the “still-working” rule.
This “still-working” exception does not apply to other retirement accounts such as 401(k) accounts with a former employer. To prevent the RMD from retirement plans with prior employers, one could roll in amounts from the prior employer plan and IRA’s to the current employer’s plan. If your current employer retirement plan permits such “roll-in’s”, you should complete the transfer in the year before you become 70 1/2 to avoid the RMD’s on these other plans.
If 70 is the new 50, and you feel like retirement is not what you want yet, the “still-working” exception is a good alternative. Since there appears to be no official IRS position on the question of when one has ‘retired”, you could consider “part-time” work as an employee of your current employer.
Of course, you will want to consider your other sources of income including Social Security that would start at age 70 if you have not already begun taking payments. We can assist you in this planning and the tax effects of the alternative routes you choose.