I’m 75 and still working. What happens to my retirement plans?

August 11, 2021

Q. I am 75 years old and a long-time full-time employee and a participant in my employer’s 401(k) plan. I am aware that as a non-owner, as long as I remain employed, I may continue to contribute to my 401(k) and I am not required to take any Required Minimum Distribution (RMD). I plan to keep working through the end of this year, which I understand means I will not be required to take a RMD for 2021 in 2022. If I decide to retire sometime during 2022, is there a particular date I can work until that leaves me eligible not to take the RMD for 2022? And if I can arrange to remain employed on a part-time basis, what would allow me to avoid taking the RMD?

— Still working

A. The rules surrounding Required Minimum Distributions (RMDs) can be complicated.

As you know, 401(k) plans, like IRAs, are subject to RMD rules.

These rules dictate that once you reach the age of 72 — or 70½ if born before July 1, 1949 — you must begin to withdraw money out of these tax advantaged accounts, said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

She said the withdrawal rate is based on your age and life expectancy, as defined by the IRS.

“The penalty for not taking a required distribution is 50% of the required amount – ouch,” she said. “It’s very important that you get this right.”

Participants in workplace retirement plans who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start taking distributions from these plans, she said, noting this is not true for IRAs.

“The first RMD must be taken by April 1st of the later of the year after you turn 72, or the year after you retire,” Wolfe said. “Your second RMD however, must be taken by Dec. 31 of that second year.”

So it could be that you are taking two RMDs in that second year, she said.

Wolfe recommends careful tax planning to determine whether you should instead take that first RMD by the end of the first year — the later of the year you either turn 72 or retire — so you don’t have this doubling up in one year.

To qualify not to take the RMD because you are still working, you must make sure you work at least one day in the following year, she said.

“If you retire on Dec. 31, 2022, even if you work a full day on that day, then 2022 will be considered the year you retire,” Wolfe said. “You must be employed for some part of 2023, even if it is one day, to be considered still working in 2022.”

The answer to your second question is not as clear cut, Wolfe said. That’s because the IRS has not defined what would be considered “still working” or “retired” for this purpose.

However, she said, it is widely interpreted that if the employer and the definitions in the employer’s retirement plan consider the person to be employed, then a person would qualify for the “still working” exception to the RMD rules.

For example, she said, the plan documents may say that you must work “X” number of hours per week to qualify to participate in the plan. If you don’t meet that qualification, the IRS may find that you are not “still employed” and you would be subject to the RMD rules.

“Additionally, if you change your category of work from employee to independent contractor, you would not be considered still employed for this purpose,” she said. “The penalty is a steep one and as always, I would advise you to consult with a tax professional.”

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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.