What is the "Still Working Exception?"

What is the "Still

Working Exception?"

There is no still working exception for IRAs, Simple IRAs or SEP IRAs. This exception only applies to certain qualified employer retirement plans. If you have a qualified employer retirement plan,

you generally need to start taking required minimum distributions (RMDs) by April 1st of the year following the year you turn 70½, just like the standard IRA RMD rule. However, your employer plan may have a “still working exception” for employees who are still actively working for that employer but are over the age of 70½. Under this exception, as long as the employee doesn't own more than 5% of the company, an employee who is over 70½ but is still working for the company, may choose to delay his/her first RMD from that employer retirement plan until April 1st of the year following the year the employee retires.

Note: Many are confused by this rule so to clarify, if the 70½+ employee also has an IRA, the employee must begin taking his/her RMDs from that IRA even though he/she is still working and has elected to delay RMDs from his/ her employer qualified retirement plan.

To illustrate the still working exception, assume you have a 401(k) and the plan permits a still working exception, an option you elected. You are now 72 years old and you decide to retire today. Your retirement immediately triggers your required beginning date for distributions as April 1, 2015 and thus begins your RMD requirement. 

The catch in this scenario is, if you choose to delay your first RMD and do not take it until, say, March 2015, you will still need to take your regular RMD for 2015 by December 31st next year.

For some people, having to take two RMDs in the same tax year is not a good idea from a tax planning perspective. Be sure to consult with your personal retirement distribution expert and tax advisor to determine your best course of action.