Do I Need to Take an RMD From My 401k if I Am Still Working?

Federal law requires individuals to take withdrawals, known as Required Minimum Distributions (RMDs), from their retirement savings once they reach a certain age. The purpose of RMDs is to ensure the government can collect tax revenue on these tax-deferred funds. The age to begin RMDs is 73 for individuals reaching that age after December 31, 2022, though it is scheduled to increase to 75 in 2033. This rule applies to various retirement plans, including 401(k)s. For many retirees, these distributions are a part of their planned income stream. However, an exception for individuals who continue to work can alter the timing of these mandatory distributions.

The Still Working Exception Explained

A provision in the tax code, often called the “still working exception,” allows individuals to delay taking RMDs from their current employer’s 401(k) plan. To qualify for this delay, you and your plan must meet several conditions.

• You must continue to be an employee of the company sponsoring the 401(k), though it does not matter if your role is full-time or part-time.
• You cannot own more than 5% of the business that employs you. For this rule, ownership can be attributed to you from a spouse, child, or grandchild.
• The 401(k) plan’s rules must explicitly permit employees who work past age 73 to delay their distributions.
• This exception only applies to the 401(k) of your current employer, not plans from previous jobs.

You should contact your plan administrator or review the Summary Plan Description to confirm your plan’s specific provisions.

RMD Rules for Other Retirement Accounts

Even if you qualify to delay RMDs from your current 401(k), you are still obligated to take them from other retirement accounts at age 73. This includes any Traditional IRAs, SEP IRAs, and SIMPLE IRAs you hold. You must calculate the RMD for each IRA you own separately, but you can withdraw the total required amount from just one or any combination of your IRAs.

The still working exception also does not extend to retirement plans from former employers. You must begin taking RMDs from any 401(k), 403(b), or other qualified plan from a company you no longer work for once you reach age 73. For these plans, the withdrawal must be taken directly from that specific account.

Taking Your First RMD After Retirement

Once you retire from the company where you used the still working exception, your first RMD from that 401(k) is due by April 1 of the year following your retirement. For example, if you retire in 2025, your first RMD must be taken by April 1, 2026. This April 1 deadline is a one-time extension for your first RMD only.

For all subsequent years, the deadline is December 31. This means if you take your first RMD on the April 1, 2026, deadline, your second RMD for 2026 is due by December 31, 2026. Taking two distributions in one year could push you into a higher tax bracket.

The RMD amount is calculated using your account balance at the end of the prior year and a life expectancy factor from the IRS Uniform Lifetime Table. Your plan administrator will calculate this amount for you.

Penalties for a Missed RMD

Failing to take a required minimum distribution by the deadline results in a penalty. The IRS imposes a 25% excise tax on the amount of the RMD that was not withdrawn on time. For example, if your required withdrawal for the year was $20,000 and you only took $10,000, the penalty would be 25% of the $10,000 shortfall, resulting in a $2,500 tax.

This penalty can be reduced to 10% if you correct the shortfall within two years. To qualify for the reduction, you must withdraw the missed amount and file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” with your federal tax return.

The IRS may also waive the penalty if you can show the failure to take the RMD was due to a reasonable error and you are taking steps to remedy the situation. This involves withdrawing the missed amount as soon as it is discovered and attaching a letter of explanation to Form 5329 when you file.