Retirement often comes with a set of financial rules that can influence how you manage your savings. One important rule concerns Required Minimum Distributions (RMDs), which are mandatory withdrawals from retirement accounts after reaching a certain age. However, there is a practical way to avoid taking RMDs—and it involves continuing to work. This approach can be particularly useful for those who want to keep their money growing while maintaining financial flexibility.
The basic rule for many retirement accounts, like traditional IRAs and 401(k)s, is that once you turn 73 (starting from 2023, according to recent adjustments), you must start withdrawing a minimum amount each year. These RMDs can sometimes force you to take out money whether you need it or not, potentially increasing your tax burden. Yet, if you keep working, you might be able to delay these withdrawals.
The key to this strategy lies in your current employer’s 401(k) plan. If you remain employed by your company past the age when RMDs start, and you do not own more than 5% of the company, you typically do not have to take RMDs from your current employer’s 401(k). This rule can give you valuable flexibility because it allows your retirement savings in that plan to stay invested and growing longer without forced withdrawals.
For example, if you keep a job you enjoy, or if working longer fits your financial plans, this approach may suit your situation well. You avoid the immediate tax hit that comes from RMDs and keep more control over your retirement nest egg.
There is another benefit if you plan ahead. Often, people hold 401(k) accounts from previous employers as they move through their careers. Managing multiple accounts can be complicated. If your current employer’s 401(k) plan accepts rollovers, you can consolidate these older 401(k)s into your current plan. By doing this, you can also defer RMDs on these rolled-over balances.
Consolidating your accounts makes managing your savings simpler. You have fewer statements to review and fewer accounts to monitor. It can give you a clearer picture of your overall savings and help you stay organized as you approach retirement years.
However, this strategy is not for everyone. Many people look forward to retiring as soon as they can. The idea of working well into their 70s may seem daunting or undesirable. Others find joy and purpose in their work and welcome continuing their careers or part-time employment after traditional retirement age. If you fall into the latter group, continuing to work can not only keep your mind active but also help your finances.
There are practical considerations to keep in mind. Not every employer’s 401(k) plan accepts rollovers, and rules can vary. You must check with your plan administrator or human resources department to understand the specifics of your company’s policy. Also, if you have multiple old accounts spread across various employers, consolidating might take time and paperwork.
On the tax side, delaying RMDs means you postpone taxable income. This could keep you in a lower tax bracket for longer, depending on your overall income. It also allows your investments more time to potentially grow tax-deferred.
Conversely, if you leave your job or own more than 5% of the business, RMDs will apply, and you must take the required withdrawals from your 401(k) plan, even if you are still working. In those cases, alternative strategies may be more suitable.
Ultimately, combining the choice to keep working with smart management of your 401(k) accounts can offer a useful way to delay RMDs. This approach requires some effort and planning but can result in less stress during your later years when you do decide to retire.
Here are a few steps to consider if you want to apply this strategy:
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Confirm your current employer’s 401(k) rules regarding RMDs and rollovers.
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Determine if you own less than 5% of the business, which impacts RMD requirements.
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Check if your old 401(k) accounts can be consolidated into your current plan.
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Evaluate your personal and professional goals to decide if working beyond the traditional retirement age fits your lifestyle.
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Consult with a financial advisor or tax professional to ensure the strategy aligns with your tax situation and retirement plan.
Approaching retirement with this mindset can help you keep more control over your savings. It also rewards those who enjoy their work by offering additional financial benefits. By simply embracing work a little longer, you may avoid mandatory withdrawals that cut into your investment growth over time.
This method provides flexibility, keeps finances neat by consolidating accounts, and can delay facing taxes on your retirement savings. If continuing to work sounds reasonable, it may be worth exploring this strategy as part of your retirement planning.
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