The Still-Working Exception to Required Minimum Distributions

If you keep working past your RMD age, federal tax law lets you delay required minimum distributions from your current employer’s retirement plan until the year you actually retire. This is the still-working exception to required minimum distributions, and it comes from the definition of “required beginning date” in 26 U.S.C. § 401(a)(9), which sets that date as April 1 following the later of the year you reach your applicable age or the year you retire.¹ Two conditions decide whether it actually helps you: you have to be an active employee of the company sponsoring the plan, and you cannot own more than 5% of that company. Get either one wrong and the 25% excise tax on a missed distribution follows.²

Anyone reaching their applicable RMD age in 2026 was born in 1953, so the age that matters for them is 73.¹ The exception pushes the required beginning date past that age, but only for the plan run by the employer you currently work for.

Who Qualifies as Still Working

You must be an active employee of the company that sponsors the plan. The IRS has not set a minimum number of hours per week or per year, so part-time work counts as long as you remain on the payroll and have not formally separated from service. The exception ends the moment you leave, whether you quit, get laid off, or retire.²

One thing the statute allows and plan documents don’t always follow: not every qualified plan actually offers this delay. The Internal Revenue Code defines the required beginning date to include the retirement year, but individual plans have to adopt that language. Some simply apply the age-based trigger to every participant. Ask your HR department for the Summary Plan Description and check what it says about distributions while you’re still employed before you assume you can wait.

Which Accounts the Exception Covers

The still-working exception applies to employer-sponsored qualified plans: 401(k), 403(b), 457(b), and profit-sharing plans. What it covers is narrow. Only the plan of your current employer qualifies. A 401(k) sitting at a former employer stays on the standard age-based RMD schedule even while you’re still working somewhere else.²

Traditional IRAs, SEP IRAs, and SIMPLE IRAs never qualify. Owners must start distributions at 73 regardless of employment.² This is where people get caught out. A $500,000 traditional IRA and a $200,000 balance in the active 401(k) look similar on paper, but only the 401(k) is sheltered. The IRA distributions start on schedule.

Roth 401(k) and 403(b) Accounts

Starting in 2024, SECURE 2.0 eliminated lifetime RMDs from designated Roth accounts inside 401(k) and 403(b) plans.³ If your workplace contributions go to a Roth 401(k), you don’t need the still-working exception for those dollars. Roth IRAs were already exempt during the owner’s lifetime.⁴ Beneficiaries who inherit these accounts still face distribution rules after the owner dies.

Pre-1987 403(b) Balances

A 403(b) with contributions from before 1987, where the plan has kept those amounts in separate records, gets a different rule. Those pre-1987 dollars don’t have to come out until December 31 of the year you turn 75, or April 1 of the year after you retire, whichever is later. If the plan didn’t track the balances separately, the full account follows the normal RMD schedule.²

The 5% Owner Disqualifier

If you own more than 5% of the business sponsoring the plan, the still-working exception is off the table. You have to begin distributions by April 1 of the year after you reach your applicable age, whether you’re working full time or not.¹ The definition of “5-percent owner” comes from IRC § 416 and covers anyone owning more than 5% of the outstanding stock of a corporation or more than 5% of the capital or profits interest in an unincorporated business.⁵

Constructive ownership counts too. Shares held by your spouse, children, grandchildren, and parents can be attributed to you for this test. A physician who personally owns 3% of a medical practice while a spouse owns another 4% ends up over the 5% line and loses the exception. In closely held businesses where family equity shifts around, the ownership numbers have to be tracked carefully.

Governmental plans and church plans are exempt from the 5% owner restriction entirely.¹ A government employee who owns a side business with a larger stake can still use the still-working exception for the government retirement plan.

Rolling Outside Accounts Into the Sheltered Plan

Because the exception only covers your current employer’s plan, some workers roll IRA and old 401(k) balances into that active plan before RMDs begin. The rolled-in dollars then sit under the same still-working shelter, so a traditional IRA that would otherwise start distributing at 73 gets delayed along with everything else in the current plan.

Several conditions have to line up. Your current plan must accept incoming rollovers, and plans are not required to.⁶ Any amount that has already become an RMD cannot be rolled over, so the transfer has to happen before RMDs kick in on those outside accounts. And you obviously cannot be a 5%-plus owner. Check with the plan administrator a year or two before your applicable age to find out whether the plan will take these rollovers.

What Happens the Year You Retire

Once you separate from service, the clock starts. The first RMD is due by April 1 of the calendar year following the year you retired. Every RMD after that is due by December 31.² Tell your plan administrator the exact retirement date as soon as it’s set. Most plans want a formal retirement notice or specific election forms before they’ll process a withdrawal.

The Double-Distribution Trap

The April 1 grace period on the first RMD creates a tax problem. If you push that first distribution to April 1 of the year after you retire, the second distribution is still due by December 31 of that same year. Two withdrawals land in one tax year.²

Retire in 2026 with $800,000 in a 401(k) and the first RMD might run around $30,000, with a similar second one. Taking both in 2027 stacks roughly $60,000 into one year of taxable income instead of splitting it across two. That extra income can bump you into a higher federal bracket, raise Medicare premiums through IRMAA surcharges, and make more of your Social Security taxable. Taking the first distribution in the actual retirement year, rather than waiting until April 1, usually costs less.

Aggregation Across Multiple Plans

If you have 401(k) accounts at more than one former employer, calculate and take the RMD from each plan separately. You can’t total them and pull the full amount from one, the way IRA owners can.⁷ Multiple 403(b) accounts are the exception: their RMDs can be totaled and drawn from any one or combination of them. Assuming 401(k)s and 403(b)s follow the same rule here is a common mistake.

Penalties If You Miss a Distribution

Missing a required distribution triggers a 25% excise tax on the amount you should have taken. SECURE 2.0 cut it from the old 50% figure and added a further break: correct the shortfall within two years and the tax drops to 10%.²

A genuine mistake can qualify for a full waiver through IRS Form 5329. You fill in the relevant lines, write “RC” on the dotted line next to the penalty amount along with the shortfall you want waived, attach a written explanation, and pay any remaining tax owed. The IRS reviews it and tells you if the waiver is denied.⁸ Situations that tend to count as reasonable error include bad advice from a plan administrator, a plan’s failure to process a distribution request, or a genuine misunderstanding about when the still-working exception ended.

The numbers make the point. On a $40,000 missed RMD, the 25% tax is $10,000, on top of the regular income tax owed when the distribution finally comes out. Even the reduced 10% rate is $4,000. A short call to the plan administrator to confirm eligibility and deadlines is cheaper than either.

1
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners
4
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
5
Office of the Law Revision Counsel. 26 USC 416 – Special Rules for Top-Heavy Plans
6
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
7
Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
8
Internal Revenue Service. Instructions for Form 5329