Understanding Required Minimum Distributions (RMDs)
If you’re thinking about working past retirement age, it’s important to know how this choice could affect your Required Minimum Distributions (RMDs). RMDs are a key part of retirement planning for anyone who has been saving in certain retirement accounts. Let’s break down what RMDs are, which accounts they impact, and why the IRS requires them.
What Are RMDs?
Required Minimum Distributions, commonly known as RMDs, are the minimum amounts that the IRS mandates you to withdraw from most retirement accounts each year once you reach a certain age. You can always take out more than the required amount, but not less. The goal is to ensure people eventually pay taxes on money that was set aside tax-free for years.
Which Retirement Accounts Do RMDs Affect?
| Retirement Account Type | Subject to RMDs? |
|---|---|
| Traditional IRA | Yes |
| 401(k), 403(b), 457(b) plans | Yes |
| Roth IRA | No (during account holders lifetime) |
| Roth 401(k) | Yes (until 2024; starting 2024, no RMDs for Roth 401(k)s) |
Quick Facts About RMDs
- The starting age for RMDs is currently 73 if you turn 72 after January 1, 2023 (it used to be 70½).
- You must take your first RMD by April 1 of the year after you reach the required age. After that, withdrawals are due by December 31 each year.
- If you don’t take your RMD, the IRS can hit you with a hefty penalty—25% of the amount you should have withdrawn (this dropped from 50% in previous years).
Why Does the IRS Require RMDs?
The main reason is taxes. Traditional IRAs and many workplace retirement plans allow you to defer paying taxes on your contributions and investment gains until you withdraw the money. The IRS doesn’t want these funds to grow tax-free forever, so they require you to start withdrawing—and paying income tax on—them at a certain age.
Summary Table: Key Points About RMDs
| Feature | Description |
|---|---|
| Who Must Take RMDs? | Anyone with a traditional IRA or employer-sponsored plan who has reached RMD age |
| When Do RMDs Start? | April 1 following the year you turn 73 (if born after Jan 1, 1951) |
| Affected Accounts | Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), some Roth accounts (see above table) |
| Penalty for Missing RMD | 25% of the amount not withdrawn (can be reduced to 10% if corrected promptly) |
This basic understanding of Required Minimum Distributions will help set the stage for knowing what might change if you continue working past traditional retirement age.
2. The Standard RMD Start Age and Recent Changes
Understanding when you need to start taking Required Minimum Distributions (RMDs) from your retirement accounts is crucial, especially if you’re thinking about working past the usual retirement age. Over the years, the rules around RMDs have shifted, mainly due to legislation like the SECURE Act. Here’s a closer look at the current guidelines and recent updates that could impact your retirement planning.
What Is the Standard RMD Age?
The standard age for starting RMDs has changed in recent years. Traditionally, people had to begin taking RMDs from their traditional IRAs and most workplace retirement plans (like 401(k)s) by April 1st of the year after they turned 70½. However, new laws have pushed this starting age later, giving retirees more flexibility.
RMD Start Age: A Timeline
| Year | Applicable Law | RMD Starting Age |
|---|---|---|
| Pre-2020 | Prior to SECURE Act | 70½ |
| 2020–2022 | SECURE Act of 2019 | 72 |
| 2023 and after | SECURE Act 2.0 (2022) | 73 (and eventually 75) |
The Impact of Legislative Changes: SECURE Act and SECURE Act 2.0
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made a big change by raising the RMD age from 70½ to 72 for those turning 70½ after December 31, 2019. Then, in late 2022, Congress passed SECURE Act 2.0, which further increased the RMD age to 73 starting in 2023, with plans to raise it again to age 75 by 2033.
Why These Changes Matter If You’re Still Working
If you’re planning on working beyond traditional retirement age, these changes can affect your strategy for taking withdrawals from your retirement accounts. Delaying RMDs gives your investments more time to grow tax-deferred. However, it also means larger required withdrawals later on, which could bump you into a higher tax bracket when you finally start taking distributions.
Quick Tip:
If you’re still working at age 73 or older and don’t own more than 5% of the company you work for, you may be able to delay RMDs from your current employer’s plan until after you retire. But this rule doesn’t apply to IRAs or old employer plans—so knowing where your money is held is important!
3. How Continuing to Work Impacts RMD Rules
If you’re still working past the traditional retirement age, you might be wondering how that affects your Required Minimum Distributions (RMDs). The good news is that there’s a special rule known as the “still working” exception, which can help delay those mandatory withdrawals from certain retirement accounts.
Understanding the ‘Still Working’ Exception
The “still working” exception is a provision in U.S. tax law that lets some people delay taking RMDs from their employer-sponsored retirement plans until they actually retire. This means if you’re still clocking in at your job after turning 73 (the current starting age for RMDs), you may not have to start withdrawing money from your work 401(k) or similar plan just yet.
Who Qualifies for the Exception?
Not everyone qualifies for this rule. Here’s a simple breakdown:
| Eligible | Not Eligible |
|---|---|
| Still employed by the company sponsoring your retirement plan | Already retired from that employer |
| Your plan allows the exception (most 401(k)s do) | Own more than 5% of the company where you work |
| Traditional 401(k), 403(b), or similar employer plans | IRAs, SEP IRAs, SIMPLE IRAs, and old workplace plans from previous jobs |
Key Details to Remember
- This exception only applies to your current employer’s plan. If you have old 401(k)s or IRAs from previous employers, you’ll still need to take RMDs from those accounts starting at age 73.
- If you own more than 5% of the company, you don’t qualify for this exception.
- Your employer must offer this option in their plan rules. It’s smart to check with your HR department or plan administrator to confirm.
Example Scenario
Susan turns 73 but keeps working full-time at her company. Her employer’s 401(k) plan allows the “still working” exception. She doesn’t own more than 5% of the business. Susan can wait until she retires before she needs to take her first RMD from this specific 401(k). But if she has an IRA or an old 401(k) from a previous job, she’ll need to start RMDs on those accounts now.
4. Differences Between 401(k)s and IRAs for Working Retirees
How RMD Rules Change If You’re Still Working
If you’re past retirement age but still working, it’s important to know that Required Minimum Distribution (RMD) rules are not the same for everyone. The type of retirement account you have—like a 401(k) or an IRA—can make a big difference in when you need to start taking RMDs.
RMD Rules: 401(k) vs. IRA
Let’s break down the main differences:
| Account Type | Still Working Exception? | When RMDs Start | Can You Delay? |
|---|---|---|---|
| 401(k) | Yes, if you don’t own more than 5% of the company | April 1 following the year you retire (not just when you turn 73) | You can delay RMDs from your current employer’s plan while working there |
| IRA (Traditional) | No exception | April 1 following the year you turn 73 (for most people) | No delay—even if you keep working, you must take RMDs once you reach the required age |
What This Means for You
If you have a 401(k) with your current employer and you’re still working past retirement age, you might be able to put off taking RMDs until after you retire. But if all your savings are in an IRA, the IRS will require you to start withdrawing money at age 73, no matter what. This rule helps working retirees manage their taxes and cash flow better, especially if they don’t need the money right away.
5. Strategies to Manage Your RMDs While Working
Understanding the Basics
If you’re still clocking in at your job after age 73, managing Required Minimum Distributions (RMDs) from your retirement accounts can get tricky. The good news? There are smart ways to minimize taxes and make the most of your withdrawals while you keep working.
RMD Rules for Workers Over 73
| Account Type | Do You Have to Take RMDs? | Special Rules |
|---|---|---|
| Traditional IRA | Yes | No exceptions—RMDs are required even if you’re still employed. |
| 401(k) or 403(b) with Current Employer | No, if you don’t own more than 5% of the company and are still working. | You can usually delay RMDs until retirement. |
| Old 401(k) or 403(b) from Previous Jobs | Yes | RMDs are required, regardless of employment status. |
Practical Tips for Managing RMDs While Working
1. Consolidate Old Accounts
Roll over old 401(k)s into your current employer’s plan (if allowed). This move may let you postpone RMDs and streamline your finances.
2. Keep Contributing Where You Can
If your employer allows, continue contributing to your current workplace retirement account. This helps offset withdrawals and keeps your nest egg growing tax-deferred.
3. Use Qualified Charitable Distributions (QCDs)
If you don’t need all of your RMD for living expenses, consider a QCD. You can donate up to $100,000 per year directly from your IRA to a qualified charity. It counts toward your RMD but isn’t taxed as income—a win-win for charitable giving and tax savings!
4. Time Your Withdrawals Strategically
You have until April 1 of the year after you turn 73 to take your first RMD, but every year after that it’s December 31. Plan carefully—taking two RMDs in one calendar year could push you into a higher tax bracket.
5. Consider Roth Conversions
If you expect lower taxable income while working part-time or during a sabbatical, converting some traditional IRA funds to a Roth IRA may make sense. Roth IRAs don’t have RMDs during your lifetime and qualified withdrawals are tax-free.
Sample Scenario: Optimizing RMDs While Working at Age 75
| Action Taken | Tax Impact |
|---|---|
| Rolled old 401(k) into current employer’s plan | No RMD on rolled-over funds until actual retirement |
| Took QCD from traditional IRA | Satisfied part of RMD; amount donated not taxed as income |
| Took first RMD by April 1 following age 73 | Avoided penalty; planned withdrawal so as not to overlap with next year’s RMD |
Key Takeaway:
The longer you work, the more options you have to manage when and how much you withdraw from retirement accounts—and how much tax you pay. Talk to a financial advisor familiar with U.S. retirement rules to make sure you’re taking advantage of every strategy available while staying compliant with IRS regulations.
