Mandatory Distribution

Today TaxMama® hears from Patricia in the TaxQuips Forum, with this question.  “I have a client who is 70.5 and working for his own company. He has a 401k plan. Does he have to start taking distributions from his 401k because he is 70.5, even though he is still working? Can he still contribute to his 401k since he is still working? Finally, is there a difference in any of the above if his company is an S or C Corp?”

Dear Patricia,

Mike Reed, our Enrolled Agent in California replies:

Yep – because he is more than a 5% owner, RMD’s are required.

RMDs are generally not required if still employed, even part time, at 70.5+ (never seen one that was required, but still used the word “generally”), with the exception being more than 5% owner.

From the IRS page Retirement Topics – Required Minimum Distributions (RMDs):

Beginning date for your first required minimum distribution

• 401(k), profit-sharing, 403(b), or other defined contribution plan
• April 1 following the later of the calendar year in which you:
  •  reach age 70½, or
  •  retire.

5% owners – If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions  by April 1 of the year after the calendar year in which you reach age 70½.

There is no age limit for making contributions to your employer’s 401k plan.
Which is interesting – If his RMD is for example $12,000, he could contribute $1,000 @ month to offset the income.

I don’t know that an S corp or C corp would be any different.
And remember, you can find answers to all kinds of questions about RMDs and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

 

[Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]