Still Working Past 73? Here's What You Should Know About the RMD Exception

One of the nice things about saving for your senior years in a traditional retirement plan is getting to score a tax break on the money you contribute. If you're a higher earner, that tax break could be especially lucrative.

Plus, with a traditional IRA or 401(k), your money grows on a tax-deferred basis. You don't have to pay taxes on investment gains year after year as you do with a regular brokerage account.

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But the downside of saving in a traditional retirement plan is being forced to take required minimum distributions, or RMDs. Those could create a serious tax burden for you in retirement if you don't end up needing the money.

It may be that you have a decent monthly income based on your Social Security checks and other sources. If so, avoiding RMDs could mean avoiding unwanted taxes.

Of course, failing to take your RMD when you're on the hook is not advisable. The IRS imposes steep penalties for not taking RMDs when you're supposed to.

Generally speaking, you have to start taking RMDs once you turn 73. But there may be an exception if you're still working. It's important to understand how the rules work, though.

You may not have to tap your retirement plan after all

The reason behind RMDs is to ensure that your retirement account is used for its intended purpose. The IRS doesn't want IRAs and 401(k)s to become vehicles wealthy Americans use to pass wealth down to future generations.

Although you're on the hook for RMDs once you turn 73, there's an exception for people who are still working at that point. If that applies to you, you're exempt from having to take an RMD from the retirement account your current employer is sponsoring. However, that exemption does not apply to other retirement accounts you might have.

Let's say you're still working at or beyond age 73 and you have money saved in your current employer's 401(k). You do not have to worry about taking an RMD from that account.

However, let's say you also have a 401(k) from a previous employer. That 401(k) would still be subject to RMDs in this scenario, and failing to take them could result in penalties.

There's another rule to know about

You may be exempt from taking RMDs from your current employer's 401(k) if you're still working -- but only if you do not own 5% or more of the company. If you own a large share of a company, it's easy enough to keep yourself on the payroll for the express purpose of avoiding RMDs.

The IRS isn't into that. So to qualify for the RMD exemption, you cannot own 5% or more of the company you're still working for.

Delaying RMDs could work to your benefit

Not only might delaying RMDs help you avoid a near-term tax bill, but it could also work to your advantage in the context of Medicare.

RMDs from a retirement plan count as income. If your income is too high, it could result in surcharges on your Medicare premiums known as income-related monthly adjustment amounts, or IRMAAs, a couple of years later.

IRMAAs could drive up the cost of both Medicare Part B and Part D. So if you're able to avoid an RMD due to still being employed and you don't need the money, you might as well leave your retirement account untapped.

Just make sure you understand which accounts are exempt from RMDs in that situation. You don't want to skip out on an RMD accidentally and wind up with a huge penalty on your hands.

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