Enhance retirement income planning for clients by utilizing the "still working" exception to delay Required Minimum Distributions (RMDs) from qualified retirement plans.
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Understand the Basics:
- RMDs must generally start by April 1 following the year a taxpayer reaches age 73
- Exception: The required beginning date (RBD) is extended if the taxpayer is still working, allowing RMDs to start April 1 of the year after they retire.
- Eligible Plans:
- This exception is only applicable to qualified plans from the taxpayer's current employer.
- Exclusions: Individual Retirement Accounts (IRAs), SEP, SIMPLE IRA plans, and plans where the taxpayer is more than a 5% owner.
- Avoid Missteps:
- Confirm that the employer's plan supports the "still working" exception.
- Verify part-time employment status where applicable, as the IRS considers any employee, even part-time, as "still working."
- Strategic Rollovers:
- If permitted by the employer’s plan, consolidate other qualified plans and IRAs into the current employer’s plan before reaching the mandatory distribution age to extend the RMD deferral.
- Rollovers Caveats:
- Ensure only pretax dollars are rolled over; handle nondeductible contributions separately.
- Consider converting nondeductible contributions left behind into a Roth IRA to eliminate future RMD requirements and potentially minimize tax implications.
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Plan Provisions & Disadvantages:
- Review employer plan provisions carefully; they may contain restrictions that affect rollovers and fund accessibility.
- Delayed RMDs could lead to larger distributions later, possibly pushing clients into higher tax brackets, increasing taxable Social Security benefits, and/or causing client to be subject to Medicare premium surcharges.
- Implications of Delayed Cashing:
- Be aware of Rev Rul 2019-19: Distribution checks not cashed are still taxable in the year distributed, regardless of whether the check is cashed, returned, or destroyed.
Implementing these strategies can help mitigate immediate tax burdens and optimize long-term retirement income, but careful planning and thorough understanding of the client's current employer plan provisions are essential.