401k RMD and IRA RMD for Business owner selling C Corp but remaining an active employee.

Submitted by Warren McManus CLU on Mon, 2022-08-29 17:34

As a business owner (more than 5%) over age 72 I am currently required to take RMDs from both my 401k and IRA accounts.
If I sell 100% of my business and remain as a common law employee ( probably a minor officer title) , am I permitted to continue contributions without the requirement of the RMD for the 401K plan; or must I take distributions? The corporation is a C corporation. I would assume that I would have to take RMD distributions from any active IRA plans. They are not Roth accounts.
In addition what tax year would the change in employee status take effect( i. e. the year of sale or the next calendar year).

Warren



Submitted by Alan - IRA critic on Mon, 2022-08-29 18:32

  • Your status as a >5% owner is only determined one time. If you were born prior to 7/1/1949, your status with a calendar year plan was made in the year you reached 70.5. If born post 6/30/1949, then that year is the year you reached 72. Once your RMDs begin as a >5% owner, they never stop regardless of whether you are no longer a 5% owner at a later time. Conversely, if you are not a >5% owner in the determining year, and therefore are not required to take RMDs under the “still working” exception, subsequently becoming a >5% owner in a later year will not matter and you would still be able to utilize the still working exception. In short, unfortunately your 401k RMDs will have to continue from this plan in addition to your IRA RMDs. 
  • Now, suppose you sell to a larger firm and your plan is discontinued………..but you are allowed to roll your current balance into the successor plan, sponsored by your new employer where you are not a 5% owner. With a different plan how holding your former 401k, and perhaps even your IRA in a rollover, you might be able to cease RMDs, with the caveat that delaying RMDs with an ever increasing balance could put you into a higher bracket when you finally retire. The following article by Kitces explores the 5% ownership issue:
  • Delaying 401(k) RMDs With The Still-Working Exception (kitces.com)

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