The Core Distinction: Employer Plans vs. IRAs
The most important factor determining your RMD obligation while still working is the type of retirement account you hold. The rules are fundamentally different for employer-sponsored plans, like 401(k)s, and individual retirement arrangements, such as traditional IRAs.
The Still-Working Exception for Employer-Sponsored Plans
If you are still employed past age 73, you may be eligible to delay RMDs from your current employer's retirement plan, such as a 401(k), 403(b), or 457(b). This is often called the “still-working exception” and allows you to defer distributions from that specific plan until April 1st of the year after you officially retire. To qualify for this exception, you must meet several strict criteria:
- You must be an active employee, not a contractor, of the company that sponsors the plan.
- You cannot own more than 5% of the business.
- The exception applies only to the retirement plan offered by your current employer. You must still take RMDs from any prior employer's plan or IRA accounts.
It is essential to check with your plan administrator, as some employer plans may have their own rules that require distributions to begin even if you are still working. Always confirm the details of your specific plan.
The Immutable Rule for Individual Retirement Accounts
For traditional IRA, SEP IRA, and SIMPLE IRA accounts, the still-working exception does not apply. If you have reached the required beginning age, which is currently 73 for those born between 1951 and 1959, you must begin taking your RMDs by the deadline, typically December 31st of each year, even if you are still gainfully employed. This rule applies regardless of your current work status or income level. The IRS views these as separate accounts and does not grant the same deferral as with active employer plans.
Navigating RMDs with Multiple Accounts
If you have a mix of retirement accounts—for example, a 401(k) with your current employer and one or more traditional IRAs—you must handle each account according to its specific rules. This can lead to a more complex RMD strategy, such as:
- Consolidating Accounts: Rolling over an old 401(k) from a previous employer into your current employer's plan, if the plan allows, can enable you to defer RMDs on those funds as well, provided you meet the still-working criteria.
- Taking Separate RMDs: You will need to calculate and take the required distribution from each traditional IRA separately. However, the total RMD for all your IRAs can be withdrawn from a single IRA account if you prefer, as long as the total amount is correct. This is different from 401(k)s, which require a separate distribution for each plan.
The Calculation and Timing of Your RMD
Your RMD amount is calculated annually based on your account balance on December 31st of the prior year and a life expectancy factor provided by the IRS. The amount you must withdraw typically increases each year as your life expectancy factor decreases.
There is one key timing consideration for your very first RMD. You have the option to delay your first distribution until April 1st of the year following the year you turn 73. For example, if you turn 73 in 2025, you could wait until April 1, 2026, to take your first RMD. However, this means you would have to take two RMDs in 2026: your first by April 1st and your second (for the 2026 tax year) by December 31st. Taking two taxable distributions in one year could push you into a higher tax bracket, so many people choose to take their first RMD in the year they turn 73.
The Perils of Inaction
Failing to take a required minimum distribution can lead to a significant financial penalty from the IRS. The penalty is an excise tax equal to 25% of the amount that should have been withdrawn. In some cases, if the failure is corrected promptly, the penalty can be reduced to 10%. However, avoiding the penalty entirely is the best strategy.
Comparison Table: RMD Rules When Still Working Past 73
| Feature | Current Employer's 401(k) (if eligible) | Traditional IRA | Old Employer's 401(k) | Roth IRA |
|---|---|---|---|---|
| Delay RMDs while working? | Yes, until retirement* | No | No | No RMDs during owner's lifetime |
| Still working exception? | Yes, if you don't own >5% | No | No | N/A |
| How is RMD taken? | Must take RMD from each plan separately | Can aggregate and take from one IRA | Must take RMD from each plan separately | N/A |
| Tax Implications? | Yes, distributions are taxed as ordinary income | Yes, distributions are taxed as ordinary income | Yes, distributions are taxed as ordinary income | Generally tax-free |
*Requires checking with your plan administrator as not all plans offer this option.
Strategic Considerations for Working Seniors
Working past age 73 presents both challenges and opportunities for retirement planning. You can use this time to your advantage by making informed decisions about your RMDs.
1. Tax Planning: Deferring RMDs from your current 401(k) could be a strategic move if you are in a higher tax bracket while working and expect to be in a lower one after you retire. However, be mindful of the mandatory RMDs from your IRAs, which can affect your overall tax picture. Consider consulting with a financial advisor to understand how your distributions will impact your tax liability, especially if you have other sources of income like Social Security.
2. Qualified Charitable Distributions (QCDs): For those with a charitable inclination, a QCD can be a powerful tool. If you are 70 ½ or older, you can direct up to a certain amount per year from your IRA directly to an eligible charity. A QCD counts toward your RMD but is excluded from your taxable income. This can help lower your adjusted gross income, which can have other tax benefits.
3. Roth Conversions: Even if you are over 73, you can still perform Roth conversions, but you must take your full RMD for the year first. Converting some of your traditional retirement assets to a Roth IRA, where distributions are tax-free, can help reduce future RMDs and create a tax-diversified income stream in retirement. This can be complex, and professional advice is highly recommended.
Conclusion
While the answer to "Can I take RMD if I am still working past 73?" is not a simple yes or no, it is a manageable aspect of retirement planning. For most, the key takeaway is the distinction between IRA and employer-sponsored plan rules. If you are not a 5% owner and your current employer's plan permits it, you can likely delay RMDs from your 401(k) until you retire. However, distributions from traditional IRAs remain mandatory. Understanding these specific rules and your options is crucial for navigating your later working years and protecting your retirement savings. For detailed and authoritative guidance on RMDs, refer to the IRS Retirement Plans FAQs.
About the Author
This article was written by a content expert specializing in retirement planning and senior financial care, using publicly available information from the Internal Revenue Service and other financial experts. This is for informational purposes only and does not constitute financial or tax advice. Consult a financial advisor for personalized guidance.
