IRS Rules Allow Working Employees to Defer 401(k) Distributions

The Internal Revenue Service provides a still-working exception under Internal Revenue Code section 401(a)(9)(C) that allows employees aged 73 or older to defer required minimum distributions (RMDs) from their current employer's 401(k) plan until after retirement. This exception is unavailable to any participant classified as a 5% owner of the sponsoring employer, a status determined by a mechanical formula including direct and constructive ownership via attribution rules.

Taxpayers can leverage this rule by rolling over pre-tax IRA balances into a current employer's plan to shelter funds from immediate mandatory withdrawals, provided the employer plan accepts such rollovers and adopts the exception. To avoid a 6% excise tax for excess contributions, the current year's RMD must be distributed from the IRA before the rollover occurs. While this strategy can reduce the aggregate IRA balance used in pro-rata calculations for Roth conversions, it may limit investment options and eliminate the ability to make qualified charitable distributions.

Failure to take required distributions results in excise taxes under section 4974. Under SECURE 2.0, these rates are reduced to 25%, or 10% if the error is corrected within two years. The still-working exception does not apply to IRAs or plans from former employers.