What Is the IRS Still Working Exception for 401k RMDs?

Federal law requires individuals to begin taking withdrawals, known as Required Minimum Distributions (RMDs), from their retirement savings once they reach a certain age. The SECURE 2.0 Act of 2022 increased this age to 73, ensuring that deferred tax revenue on these savings is eventually paid. However, for those who continue to work past this age, the “still working exception” can alter the timeline for taking RMDs from a 401(k) plan.

Understanding the Still Working Exception

The still working exception allows individuals who remain employed beyond age 73 to delay taking RMDs from their current employer’s 401(k) plan. The deferral is permissible as long as the individual continues to be an active employee of the company sponsoring the plan, even on a part-time basis. This exception is specifically tied to the 401(k) or other eligible employer-sponsored plan of the company where the individual is currently working.

This provision pauses the RMD obligation for that specific account. The requirement to begin distributions is postponed until the individual separates from service with that employer. Once employment ends, whether through retirement or other means, the standard RMD rules are reactivated for that 401(k) plan.

This delay applies only to the funds within the current employer’s plan. Any retirement accounts held from previous employers or individual retirement accounts (IRAs) are not covered by this specific exception. These other accounts remain subject to the standard age-based RMD rules.

Eligibility Requirements for the Exception

Qualifying for the still working exception involves meeting specific criteria set by the IRS. A primary rule pertains to company ownership. An individual who owns more than 5% of the company they work for is not eligible to use this exception to delay their RMDs. This rule prevents business owners from indefinitely deferring taxes on their retirement savings. The IRS definition of ownership can be complex and may include stock owned by certain family members.

Beyond the ownership test, the 401(k) plan itself must explicitly allow for the still working exception. This is not an automatic right granted to all employees. The employer’s plan document must contain language that permits participants to delay their RMDs past the standard age if they are still employed.

To confirm eligibility, an employee should review their plan’s official documents. The most accessible document is the Summary Plan Description (SPD), which outlines the plan’s rules in more straightforward language. If the SPD is unclear, the next step is to contact the plan administrator or the human resources department directly for a definitive answer.

Application to Different Retirement Accounts

It is important to understand which accounts are eligible for the still working exception, as the rule is narrowly applied. The exception is for employer-sponsored plans, such as 401(k)s, 403(b)s, and governmental 457(b) plans. As established, it only applies to the plan sponsored by the employer for whom the individual is currently working.

This means that if an individual has a 401(k) from a previous job, they must begin taking RMDs from that account upon reaching age 73, regardless of their current employment status. The still working exception does not extend to retirement plans from former employers.

Accounts Not Eligible for the Exception

Certain retirement accounts are completely excluded from the still working exception. This category includes all forms of Individual Retirement Arrangements, such as Traditional IRAs, SEP IRAs, and SIMPLE IRAs. For these accounts, the RMD schedule is strictly dictated by the account owner’s age, not their employment status.

Navigating RMDs After Retirement

Once an individual who has been using the still working exception retires or otherwise separates from service, the deferral period ends. The rules for taking the first RMD from that employer’s 401(k) plan become time-sensitive. The deadline for this initial RMD is April 1 of the year following the year in which the individual retires.

After the first RMD is taken, a regular annual schedule begins, and all subsequent RMDs must be withdrawn by December 31 of each year. This means an individual taking their first RMD on the April 1 deadline will need to take their second RMD by December 31 of that same year. This can result in two distributions in a single tax year, which could have income tax implications.

The penalty for failing to take a required RMD is 25% of the amount that should have been withdrawn but was not. Under the SECURE 2.0 Act, this penalty can be reduced to 10% if the shortfall is corrected in a timely manner.