There are many benefits to working beyond the age of 70, the greatest of which is that those who work later in life—and enjoy what they do—often experience good health. If, however, a person does not enjoy the work that they do, or simply does not wish to work past 70, then a path to retirement must be established. The focus of this article is to showcase the benefit of being able to defer required minimum distributions (RMDs).
It is not uncommon in today’s world for adults to continue working beyond the age of 70 if they enjoy what they are doing and they are healthy. This normally means that the need to draw on income accumulated in a retirement account is not necessary because the employment income fully supports the family budget. Nevertheless, the tax law indicates that beginning at age 70.5 years, you must annually take a percentage of your retirement account balances based on your life expectancy of the minimum required distribution tables. This distribution of taxable income can incur significant federal and state income tax impacts and possibly a medicare income-related monthly adjustment amount surcharge impact.
Many people who are saving for retirement do not know that there is an exception to this age 70.5 rule for those who work beyond the age of 70. If you are not the owner of the company where you work, then you can defer RMDs until the year you retire. In addition, if you roll all of your individual retirement account balances into your employer plan, then you can defer all RMDs during the years that you continue working. If you retain money in an individual retirement account (IRA), then there is a mandatory RMD each year. Simply rolling these IRAs into your employer plan will eliminate all of that unnecessary income. Unfortunately, few financial advisors will inform you to roll money—from which they collect fees—into your employer plan so as to eliminate the unnecessary RMD.
Most employer retirement plans will gladly allow you to roll over your IRA balances and previous employer plans into your current employer plan, although your current employer plan may have a provision to restrict roll-ins into their plan or have requirements that are difficult to fulfill. Such restrictive employer plans are few and far between: I know of only four employer plans in eight years (~80 employer rollover attempts) that were difficult or impossible to work with.
One added piece of advice for anyone who does defer all retirement accounts into their current employer plan in an effort to defer the RMD: Wait until after January 1 to fully retire. The reason for this is that if you retire on December 31, you will have a retroactive RMD for the entire year. If you wait until January 2, then the first RMD will not be due until April 1 of the year after you retire. Such benefits are immense to the person who works beyond the age of 70 and is in no need of their retirement account RMD, but it must be done correctly, and most advisors have no incentive to help you.
Tax guidance is a key component to personal financial advice in today’s world, but unfortunately, most advisors have only nominal tax knowledge. Contact the Financial Consulate today if you are in need of expert assistance with your roll over into your employer plan.