RMDs When You are No Longer “Still Working”
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Required minimum distributions (RMDs) are fact of life for most retirement account owners once they reach age 70 ½. However, if you fit the definition of “still-working” you catch break and can delay your RMDs. What happens when you finally decide to throw in the towel and begin your well-earned retirement? Well, RMDs must start and that’s when things can get a little complicated. You will want to proceed with caution because a missed RMD is a costly mistake. There is a 50% penalty on an RMD that is not taken. That is not the way you want to start your golden years!
The “Still-Working” Exception
If you have a company retirement plan, the required beginning date for RMDs is April 1st of the year following the year you reach age 70 ½. However, if you don’t own more than 5% of the company and your plan allows, you can delay your RBD to April 1st of the year following the year you finally retire. This is sometimes called the “still working” exception. It only applies to RMDs from employer plans. It does not apply to IRAs. It also does not apply to an employer plans if you are not currently working for that company. This provision is optional on the part of the plan. Your plan is not required to have a “still-working” exception.
RMDs Begin in Year of Retirement
If you are “still-working”, when you finally retire you must take an RMD for the year you retire. That RMD must be taken by April 1 of the following year. This is true no matter how late in the year you retire.
Example: Pedro, age 75, is “still working” for a company. He does not have to take RMDs from the company plan until April 1 of the year after he retires. Pedro decides to retire December 1, 2016. Pedro must take an RMD for 2016. He has until April 1, 2017 to take the RMD.
Rolling Over to an IRA
Things may get a little complicated if you are planning to roll over your company plan to your IRA when you retire. Your RMD from your plan is not eligible to be rolled over to an IRA. The rules also say that your RMD is the first money to leave your retirement account in a year when an RMD is required. This means you must take the RMD first and then you may roll over the rest of the funds in you plan.
You do not also need to take an RMD from your IRA for the year of the rollover. However, an RMD will be required on those funds the next year.
Example: Pedro from our previous example, decides he would like to do a direct rollover to a newly established IRA from his company plan upon retirement in 2016. Pedro must take his RMD in 2016 prior to rolling over the remainder of his plan balance. Even though his required beginning date is April 1, 2017, because he is taking a distribution from the plan in 2016, his 2016 RMD will be the first money out. He does not need to also take an RMD from his IRA for 2016. In 2017, he will need to take an RMD from the IRA.
Professional Advice
The rules can be complex. To be sure that everything is done the right way and you do not risk taxes and penalties, your best bet is to seek advice from a knowledgeable tax advisor.