The “Still-Working Exception” and December 31 Retirement
As the end of the year approaches, you may have plans to retire on December 31.
However, if you are using the “still-working exception” to defer required minimum distributions (RMDs) from your 401(k) (or other company plan), you may want to delay your retirement into 2026.
Normally, you must take the first RMD from a plan by April 1 of the year following the year you turn age 73. (This is the same for IRAs.) But if you are still employed at that time, the still-working exception allows you to put off your first plan RMD until April 1 of the year after the year you retire.
Beware of a few restrictions on using this exception. It’s not available if you own more than 5% of the company maintaining the plan. (The ownership interest of certain family members counts towards your ownership interest.) Also, plans are not required to apply the still-working exception, but most do. Finally, the exception only applies to the funds in the 401(k) plan where you are currently working. It does not apply to dollars in any 401(k) plan of a former employer – unless you roll those dollars over to your current employer’s plan.
Have you “retired” if you go from full-time to part-time employment?
The IRS has never said. Most experts believe that, as long as you’re still considered employed by your company, you remain “still-working” – even if you’re just working a few hours periodically. But be careful about abusing this rule.
What is your retirement date if your last day of work is December 31?
For example: If you leave work for good on December 31, 2025, have you “retired” in 2025 or 2026? If you’ve retired in 2025, your first RMD year is 2025, and your first RMD is due by April 1, 2026. But, if you’ve retired in 2026, the first RMD can be delayed until April 1, 2027. The IRS has also never answered this question. But the consensus is that a last-day-of-work of December 31, 2025, means you’ve retired in 2025.
Although the still-working exception sounds worthwhile, keep in mind that you (or your beneficiaries) will have to face RMDs sooner or later. So, it might not be such a great idea to kick the RMD can down the road to a time when required distributions will likely be larger and tax rates may be higher. But if you’re thinking about retiring at year end and you’re sure that delaying RMDs makes sense, see if you can put off your actual last day of work into 2026.
One last point
If you want to do a rollover of your 401(k) funds to an IRA in the year you retire, you can’t defer your first RMD until April 1 of the next year. You also can’t roll the plan RMD to the IRA with the intent of taking it from the IRA later. Instead, you must first take that RMD before doing the rollover.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
