IRA

Doing Well by Helping Others Do Good: Rethinking the Still Working Exception to RMDs

March 1, 2019

For the charitably inclined, there is reason to consider rolling over retirement savings to an IRA to accomplish what are known as qualified charitable distributions.

Folks still working when they reach age 70½ may be able to push back required distributions from their employer-sponsored retirement plans until actual retirement. This is known as the “still working exception“ to the required minimum distribution (RMD) rules. As a result, these employees have an incentive to consolidate their retirement savings in the plan of the employer for whom they are working when they reach age 70½ in an effort to avoid taxable payments that they may neither want nor need.

For the charitably inclined, however, there may be a reason to consider rolling over these retirement savings to an IRA to accomplish what are known as qualified charitable distributions (QCDs).

Let’s consider both.

 

The “Still Working Exception”

Plan participants with paychecks may be looking for ways to avoid taxable distributions of their retirement accounts. The “still working exception“ affords them a workaround to pesky RMDs that would otherwise add to their taxable income.

If their plan at work allows them to defer the age 70½ start date on RMDs until retirement, and the plan allows them to roll in other retirement savings (traditional IRAs, former employer plans, etc.), the RMD problem is solved—at least until they retire

The "still working exception" applies only to a current employer plan and employees. It does not apply to:

  • Owners (more than 5%) of the company that sponsors the plan.
  • Any former employer plan.
  • SEP-IRAs and SIMPLE IRAs, whether still working or not.
  • Traditional IRAs.

Before considering the QCD alternative to plan consolidation, let’s round out the discussion by noting that, if relying on the “still working exception,“ an RMD would be due for the year of retirement. Those retirees older than age 70½  would have until April 1 of the following year to take this first distribution. If the retiree waits until this date, then a second distribution would be required by the end of that year as well—a distribution twofer. And if the retiree dies while still working—ouch—the retiree is deemed to have died before his or her required beginning date with respect to that plan, and there is no RMD due for the year of death—whatever consolation that provides.

 

QCDs

QCDs are charitable gifts of IRA distributions that provide an alternative to the “still working exception“ for RMD management. QCD donors must be:

  • Age 70½ or older.
  • The named owner of a traditional IRA, inherited IRA, or inactive SEP-IRA or SIMPLE IRA.

The maximum annual QCD is $100,000 per taxpayer per calendar year aggregated among all of their IRAs.

In addition to benefiting the charity, the beauty of the QCD is that it:

  • May qualify as an RMD.
  • Reduces the amount of taxable IRA distributions by the amount of the QCD

For example, a $25,000 QCD could count toward a given year’s RMD but would not be added to that year’s adjusted gross income.

Keep in mind, these charitable gifts are not allowed from any other retirement plan (for example, 401(k) and 403(b)).

 

Putting It All Together

Folks who are working beyond age 70½ may be tempted to kick the can down the road on RMDs by relying on the “still working exception“ to the RMD rule. An alternative approach may be to gift RMDs as QCDs from an IRA. This would require funding the IRA while still working. Such funding could be accomplished by performing an in-service distribution of plan assets and rolling them over to an IRA. 

For additional information about RMDs and QCDs, please feel free to contact the Retirement Strategies Group at (800) 722-2333, extension 3939, or email us at RSG@PacificLife.com.


Attachments/Links

Picture of James B. Schomburg

Jim is a Senior Retirement Strategies Group Consultant with more than 20 years of industry experience. Prior to his current position, he worked as an advanced marketing attorney for other insurance and wealth-management firms. He began his financial services career in the private practice of law, focusing on estate planning and administration as well as family and real estate law.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency