The “Still-Working Exception” and December 31 Retirement
For many workers, December 31 feels like the perfect retirement date. The calendar year ends, a new chapter begins, and retirement starts with a clean slate.
However, if you plan to use the still-working exception to delay required minimum distributions (RMDs), your retirement date may have important tax consequences.
A retirement date that differs by only one day could affect when you must begin taking distributions from your workplace retirement plan. Understanding how the still-working exception works can help you avoid costly mistakes and make more informed retirement decisions.
What Is the Still-Working Exception?
Most retirement account owners must begin taking required minimum distributions after reaching a certain age.
Current rules generally require individuals to begin RMDs from retirement accounts once they reach age 73. For traditional IRAs, the first distribution typically must occur by April 1 of the year following the year the account owner reaches the required age.
Employer-sponsored retirement plans follow a similar framework. However, many workplace plans offer an important exception.
The still-working exception allows eligible employees to delay RMDs from their current employer's retirement plan until after retirement. Instead of taking distributions based solely on age, participants can postpone withdrawals until April 1 of the year following the year they leave employment.
This exception often appeals to individuals who continue working into their seventies and do not need retirement income immediately.
Who Qualifies for the Still-Working Exception?
Not every employee qualifies.
Several conditions must be met before a participant can use this strategy.
First, the employee generally cannot own more than 5 percent of the company sponsoring the retirement plan. Family ownership attribution rules may apply, which means ownership held by certain relatives can count toward the employee's ownership percentage.
Second, the employer's retirement plan must allow the exception. Most plans offer this feature, but federal law does not require employers to include it.
Third, the exception applies only to the retirement plan connected to current employment. Assets held in retirement plans from former employers do not qualify.
This distinction surprises many retirees. A former employer's 401(k) remains subject to normal RMD rules unless the participant rolls those funds into the current employer's plan and the plan accepts rollovers.
Does Part-Time Employment Count as Still Working?
Many workers reduce their hours before fully retiring.
A common question involves whether part-time employment qualifies for the still-working exception.
The Internal Revenue Service has never issued definitive guidance on this issue. Most retirement experts believe that an employee remains eligible as long as the employer still considers the individual actively employed.
For example, someone who works only a few days each month may still qualify if the employment relationship remains intact.
However, retirement strategies that stretch the intent of the rule could attract scrutiny. Employees should work closely with plan administrators and financial professionals before relying on part-time employment to delay RMDs.
Why December 31 Can Create a Problem
Retirement timing becomes especially important near year-end.
Suppose an employee's final day of work falls on December 31, 2025. Has retirement occurred in 2025 or 2026?
The answer matters because it determines the first RMD year.
If retirement occurs in 2025, the first RMD must generally occur by April 1, 2026.
If retirement occurs in 2026, the first RMD may not be due until April 1, 2027.
The IRS has never directly answered this question. However, most retirement professionals agree that a December 31 final workday counts as retirement in that calendar year.
As a result, employees who want to maximize the still-working exception may benefit from extending employment beyond December 31 and retiring sometime in January.
A small adjustment in timing could provide an additional year before RMDs begin.
Should You Delay RMDs?
Many retirees assume that delaying RMDs always creates an advantage.
The reality is more complex.
RMDs do not disappear. Delaying distributions simply postpones them. Future distributions may become larger because account balances continue to grow.
Tax considerations also matter.
Future tax rates could increase. Larger distributions could push retirees into higher tax brackets. Additional income may affect Medicare premiums and taxation of Social Security benefits.
Before delaying RMDs, retirees should evaluate:
- Current and projected tax brackets
- Expected retirement income sources
- Future account growth
- Medicare premium implications
A delay strategy works best when it aligns with broader retirement income goals.
The Impact on 401(k) Rollovers
Retirement often triggers a rollover from a workplace plan into an IRA.
The still-working exception creates an important rule that many retirees overlook.
If retirement occurs and an RMD becomes due for that year, the retiree must take the required distribution before completing a rollover.
The RMD cannot move into the IRA.
The retiree also cannot roll the entire account balance into an IRA and take the RMD later from the IRA.
Federal rules require the RMD distribution to come out first. Only the remaining account balance qualifies for rollover treatment.
Failure to follow this rule can create tax complications and administrative headaches.
How Retirement Timing Fits into a Larger Financial Plan
Retirement involves more than choosing a final workday.
Distribution planning, tax management, Social Security decisions, healthcare costs, and investment strategies all work together.
A retirement date that appears insignificant may affect tax obligations for years.
Workers approaching age 73 should review retirement timelines carefully. The still-working exception can create opportunities, but only when it aligns with a comprehensive retirement strategy.
Small adjustments often produce meaningful results when retirement income planning receives proper attention.
Why Professional Guidance Matters
Rules surrounding RMDs continue to evolve, and retirement decisions often carry long-term consequences.
A financial advisor can evaluate whether delaying retirement by a few days or weeks makes sense based on your personal goals, tax situation, and income needs.
The right strategy depends on more than federal regulations. It should support the retirement lifestyle you want while helping you manage taxes and preserve assets.
Careful planning today can help create greater flexibility throughout retirement.
FAQ: Still-Working Exception
What is the still-working exception?
The still-working exception allows eligible employees to delay RMDs from their current employer's retirement plan until after they retire.
Can I use the still-working exception for my IRA?
No. The exception applies to eligible workplace retirement plans and does not apply to traditional IRAs.
Does the still-working exception apply to old 401(k) accounts?
No. It generally applies only to the retirement plan sponsored by your current employer.
Can part-time employees qualify for the still-working exception?
Many experts believe they can, provided the employer still considers them actively employed.
If I retire on December 31, when is my first RMD due?
Most retirement professionals consider a December 31 retirement date to fall within that calendar year, which means the first RMD would generally be due by April 1 of the following year.
Can I roll my entire 401(k) into an IRA after retirement?
Not if an RMD is due. You must first take the required distribution before rolling over the remaining balance.
Should I delay retirement to postpone RMDs?
It depends on your tax situation, income needs, and retirement goals. A financial advisor can help determine whether the strategy makes sense for you.
Plan With Confidence
Secure your financial future with expert guidance. Schedule a complimentary consultation with a licensed advisor today.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
