The 5% Owner Rule: RMD Timing, Attribution, and Plan Coverage

If you own more than 5% of the business that sponsors your retirement plan, the 5% owner rule requires you to begin taking required minimum distributions based on age alone, even if you are still working full time. The still-working exception that lets rank-and-file employees postpone RMDs until they actually retire is not available to you.¹ Founders, family business operators, and anyone whose relatives hold shares in the sponsoring company can get pulled across the threshold without realizing it.

Who Counts as a 5% Owner

The test looks at equity, not job title or authority. For a corporation, you are a 5% owner if you hold more than 5% of the outstanding stock or more than 5% of the total combined voting power. For a partnership, LLC, or other non-corporate entity, the question is whether you hold more than 5% of the capital or profits interest.²

Read “more than” literally. Exactly 5% does not trigger the rule; you have to exceed the line. Pull the corporate stock ledger or operating agreement and pin down your exact percentage before assuming you can delay.

Family Attribution Can Push You Over the Line

You do not need to hold shares in your own name. Under the constructive ownership rules, you are treated as owning the stock or business interest held by your spouse, your children, your grandchildren, and your parents.³ If your father owns 100% of the company, you are treated as owning 100%, even with zero shares in your name and no role in the business.

The covered list is narrower than most people expect. Siblings are not included. Neither are in-laws.³ A brother and sister who each own 4% are not attributed each other’s shares. But if their parent owns 8%, both children are treated as owning that 8%.

Shares held by a trust are also attributed. Each beneficiary is treated as owning a proportional share based on their actuarial interest, and the grantor of a grantor trust is treated as owning the stock directly.³ Moving shares into a trust for estate planning purposes does not automatically get you out from under the 5% rule. Trace the chain before assuming otherwise.

When Ownership Is Tested

The IRS looks at the plan year that ends within the calendar year you reach the applicable RMD age. If you held more than 5% at any point during that plan year, you are locked in as a 5% owner for RMD purposes.⁴ Selling shares or dropping below the threshold afterward does not undo it. Someone who owned 10% during the relevant plan year and then dropped to 2% the following year still has to keep taking distributions on the same schedule.

This one-time test forecloses the obvious workaround. Without it, an owner nearing the applicable age could park shares with a sibling for a year and reclaim them later. Because any moment during the plan year counts, that maneuver does not work.

When You Have to Start

Under SECURE 2.0, the applicable age depends on your birth year. If you were born between 1951 and 1959, RMDs begin at age 73. If you were born in 1960 or later, they begin at age 75.¹ The IRS has confirmed that people born in 1959 fall into the age-73 group, resolving early statutory ambiguity on that point.

A 5% owner must take the first distribution by April 1 of the year after reaching the applicable age.¹ A non-owner employee can wait until April 1 of the year after they actually retire, which might be years later. That gap is the entire practical bite of the rule.

Watch the Double-Distribution Trap

Delaying that first distribution to the April 1 deadline creates a tax problem. The second RMD is still due by December 31 of the same calendar year, so two full distributions land in a single tax year and can push you into a higher bracket. Taking the first distribution in the calendar year you reach the applicable age, rather than waiting until the following April, usually spreads the income more evenly and produces a better result.

Which Plans This Rule Reaches

The 5% owner rule applies to qualified employer-sponsored plans where the still-working exception would otherwise be available. In practice, that means 401(k) plans and 403(b) plans offered by public schools, churches, and other tax-exempt organizations. If you are not a 5% owner, you can delay RMDs from these plans until you retire. If you are, that delay is gone.¹

Traditional IRAs, SEP IRAs, and SIMPLE IRAs never offered a still-working exception in the first place. Every IRA owner must begin distributions at the applicable age regardless of ownership percentage.¹ The 5% owner rule matters only where non-owners could otherwise wait.

The Roth 401(k) Carve-Out

Starting in 2024, designated Roth accounts inside employer plans, including Roth 401(k) and Roth 403(b) accounts, are no longer subject to RMDs while the account owner is alive.¹ This applies to everyone, 5% owners included. A business owner who has been making designated Roth contributions does not have to take distributions from that portion of the account, even though the pre-tax balance still triggers mandatory withdrawals. Owners who expect to remain in a high bracket well past the applicable age can shift future contributions to the Roth side of the plan and shrink the forced distribution over time.

Multiple Plans Do Not Aggregate

If you participate in more than one employer-sponsored defined contribution plan, you must calculate and take the RMD separately from each one. You cannot total them up and pull the combined amount from a single account.⁵ This catches owners who have plans at more than one business, or a 401(k) from a former employer sitting alongside their current plan.

IRAs work differently. With multiple traditional IRAs, you calculate the RMD for each but can take the combined total from any one of them. The same flexibility applies among 403(b) accounts. 401(k) plans get no such break: each plan distributes its own amount from its own assets.⁵

What Happens If You Miss One

A missed RMD triggers an excise tax of 25% on the shortfall, calculated as the difference between what should have come out and what actually did. The tax falls on the account owner, not the plan.⁶

You can reduce that to 10% by withdrawing the missed amount and filing a return that reflects the corrected tax during the correction window.⁶ The window runs from when the tax is imposed until the earliest of three things: the IRS mails a notice of deficiency, the IRS assesses the tax, or the last day of the second tax year beginning after the year of the shortfall. In most cases that gives you roughly two years to fix it before the higher rate becomes permanent.

To correct the error, withdraw the shortfall as soon as you spot it and file Form 5329 with a statement explaining what happened. The IRS can waive some or all of the excise tax if the shortfall resulted from reasonable error and you are taking steps to fix it. On the form, enter “RC” and the amount you want waived on the dotted line next to line 54, then subtract that amount from the total shortfall before calculating any remaining tax.⁷

On the plan side, the IRS runs two correction tracks. The Self-Correction Program lets a plan sponsor fix RMD errors without filing an application, but it cannot waive the participant’s excise tax. The Voluntary Correction Program can go further and include a request to waive that tax.⁸ For a 5% owner who is often both the participant and the person running the plan, this matters twice: you may need to address the same error as the plan sponsor and as the individual who owes the tax. A plan that repeatedly fails to enforce RMDs also risks losing its qualified status, since a plan must be operated according to its terms and required distributions are among them.

1
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
2
Office of the Law Revision Counsel. 26 USC 416 – Special Rules for Top-Heavy Plans
3
Office of the Law Revision Counsel. 26 USC 318 – Constructive Ownership of Stock
4
Legal Information Institute. 26 USC 401(a)(9) – Required Distributions – Section: Required Beginning Date
5
Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
6
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
7
Internal Revenue Service. Instructions for Form 5329
8
Internal Revenue Service. Correcting Required Minimum Distribution Failures