ALBUQUERQUE, N.M. — Q: I have a large balance in a 401(k) plan with my employer and turn 70-1/2 in 2019. I know that generally I must take my first distribution by 4-01-2020. But there is an exception if I continue to work. The HR people tell me I need to consult with my own tax adviser to determine how this still working exception to taking required distributions works. Can you explain the rule?
Certainly. As you state, a participant in a qualified retirement plan such as a 401(k) must generally take required minimum distributions in the year that they turn 70-1/2.
The tax law allows the first RMD to be deferred until April 1 of the year after you reach 70-1/2. If you defer the first required distribution you must then take two RMDs in the second year.
An exception to this rule allows you to defer the first distribution until April 1 of the year after you retire. So if you continue to work for the entire 2019 calendar year, you will not need to take the first RMD by April 1, 2020.
This rule applies only to qualified retirement plan distributions and not to IRAs (including SEPs). A 401(k) is a qualified plan, so the deferral option is available. If you also have any IRA accounts you will still be required to start RMDs.
The meaning of “retirement” is not clear but is tied to the employer’s plan for which RMDs would otherwise apply. This means several things.
First, if you have balances in several qualified employer plans because you have worked at multiple employers, the deferral option applies only to the balance in the plan of your current employer.
Second, since the exception applies to the current employer’s plan, the current employer should be the party that decides whether you are still working or have retired. You need not work full time if the employer considers you to still be employed.
There is an exception to this exception for employees who own more than 5 percent of the employer. I will assume that you do not own more than 5 percent, so that you are otherwise eligible for the exception.
The deferral applies to April 1 of the calendar year after you retire. If you retire on December 31 you are treated as having retired in that calendar year.
This means that you must generally take your first RMD, for the 2019 year, by April 1, 2020. If you retire anytime during 2019, including on December 31, you must still take the first RMD by April 1, 2020.
If you are treated as still employed until, say, sometime in January of 2020, you can then defer the first RMD until April 1, 2021.
Q: My son took a new job in New York City that pays $75,000 per year. The employer offers a 401(k) plan with a 75 percent matching contribution. I have told my son that he should maximize his contribution to take advantage of the very generous employer match. He does not want to do this because it is so expensive to live in Manhattan that he has no extra cash to make a contribution with. I know I can give him $15,000 each year without filing a gift tax return. If I give him $15,000 conditioned on his making a 401(k) contribution is that OK?
Yes, that is fine. The way that plan would work is that you would need to make a gift to him with the explanation that you will continue to make gifts in future years provided he makes an elective deferral contribution to the employer’s plan equal to your gift.
If he accepts the gift and does not make the contribution, you cannot demand the gifted money back, but you can follow through on the condition that future gifts will cease if he does not make a 401(k) contribution.
I agree that the employer’s plan is extremely generous and that your son should make a plan contribution. You may want to confirm with your son that the match applies to all contributions and not some capped amount. That knowledge may affect how much you want to gift to him.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.