Ed’s august newsletter contains a lot of reminders and “nuggets” regarding the “still working” exception.
It go me thinking….
Would it be possible for a > 5% owner to separate from service after 70.5 – take the RMD for the year of separation and subsequently establish a Solo (k) or PS plan in effort (stop) cease RMDs?
It seems like this would be great strategy to stop RMDs.
Thank you
in the August newsletter…Per the newsletter….Mark owns 35% of Disco Mining. The company’s 401(k) plan has a still-working exception as part of the plan. Mark is 70½ this year, so he will not be able to use the still-working exception. When Mark is 74, he sells his shares of the business to his children. He no longer has any ownership. Mark is still unable to use the still-working exception, because his ownership status is determined in the year he turns 70½ and cannot be changed at a later date. At age 76, Mark separates from service and decides to start a new company. He is now the 100% owner of Ruby Quarry which has a still-working exception provision in its 401(k) plan. Mark will not have to take RMDs from Ruby Quarry’s 401(k) plan, because he was not an owner of the company in his 70½ year. He can also move the assets from Disco Mining to the 401(k) plan of Ruby Quarry and be able to use the still-working exception for the combined plan assets that are now in the 401(k) of Ruby Quarry. However, he will have to take his RMD from the Disco Mining plan before he can move the remaining assets to Ruby Quarry
Well, that is a very interesting interpretation, but I would like to see some specific IRS guidance to back it up. While it is clear that 5% owner status is determined in year 70.5 for all employees, but if the taxpayer is either not an employee at 70.5 or the business does not yet exist when he is 70.5, it seems illogical that a person could start a new business, roll other plan balances into the plan of the new firm and forever avoid RMDs by simply not retiring. He might be too old to work at some point, but retention of ownership allows him to escape all RMDs for life? That would be quite a loophole. To clarify, the question is whether these rules apply to businesses not even in existence when employees are 70.5, or just when the employee is active in that year.
Looking to see if RMDs rules apply to a business that has yet to be created. In other words following Ed’s example. If Ed’s interpretation is correct an individual > 70.5 could set up a Solo K avoiding RMDs until the plan is terminated.
Permalink Submitted by Alan - IRA critic on Mon, 2017-07-31 17:01
A solo K is also obviously for a 5% owner, so RMDs would just continue. The person would have to become an employee 5% or less owner, could roll the former plan into the new 401k and stop the RMDs for all amounts now in the employee’s 401k.