FINANCE

Can You Avoid Them While Still Working?

Required minimum distributions, or “RMDs,” are the government’s way of getting its tax money back on retirement accounts.

Starting at age 73, anyone with a pre-tax retirement account such as an IRA or a 401(k), must begin must begin withdrawing a minimum amount from this account each year. This triggers a tax event, generating the income taxes that you haven’t yet paid. It’s the IRS’ way of making sure that, sooner or later, you pay taxes on your pre-tax retirement contributions. Partially for that reason, RMDs don’t fully apply to post-tax accounts such as a Roth IRA.

But continued employment can be an exception to this rule – for certain account types. Even if you have reached the age cutoff, you do not have to begin taking RMDs from an employer-sponsored retirement plan as long as you still work for the employer sponsoring the plan. This is true even if you have dropped down to part-time work. But individual retirement accounts (IRAs) are a different story.

Here’s what you need to know.

A financial advisor can help you develop a plan to minimize taxes in retirement. Talk to a financial advisor today.

Starting at age 73, you must begin withdrawing money from any pre-tax retirement accounts that you hold, including IRAs, 401(k)s, SEP IRAs, 403(b)s and any other similarly-situated portfolios. These withdrawals are taxed the same as any other retirement fund withdrawals, so they are part of your taxable income for the year.

This rule does not apply to Roth IRA plans. Effective as of 2024, it will also no longer apply to Roth 401(k) and Roth 403(b) plans either, although RMD rules do apply to those plans for tax year 2023. All inherited Roth plans are still subject to the 10-year withdrawal rule.

This is called a “required minimum distribution,” or “RMD.” Previously, it applied starting at age 70 1/2. The SECURE 2.0 Act raised this age to 72 and then, from December 31, 2022, to age 73.

You must take your minimum distribution by the end of each year, although how you structure those withdrawals is at your discretion. The IRS determines the amount you must withdraw from each portfolio using a formula that weights the portfolio’s balance against your age and life expectancy. You may take more than the minimum from your portfolio, and most households do, but you pay either a 10% or 25% tax penalty if you take less than the minimum.

Talk to a financial advisor about the tax implications of your portfolio.

Continued employment can be an exception to RMD rules.


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