401(k) RMD Still-Working Exception: 5% Rule, Age 75, and Penalties

If you keep working past 73, the 401(k) RMD still working exception lets you postpone required minimum distributions from your current employer’s plan until the year you actually retire, provided you own 5% or less of the company and the plan document permits the delay. Every other tax-deferred account you hold keeps running on the normal schedule.

The 5% Ownership Limit

The exception disappears the moment you cross a 5% ownership stake in the business sponsoring the plan. Under the Internal Revenue Code, a “5-percent owner” is someone who owns more than 5% of the company’s outstanding stock, or more than 5% of its capital or profits interest if the business isn’t a corporation.¹ If you’re above that line, RMDs have to begin by April 1 of the year after you turn 73, no matter how many hours you’re still working.²

Ownership is tested during the plan year that ends with or within the calendar year you reach the applicable RMD age. A small business owner sitting at 4% at age 73 qualifies; picking up another 2% stake the next year can disqualify them for that later plan year.

Family attribution matters, and it catches people. The statute borrows the rules from IRC Section 318, so shares owned by your spouse, children, grandchildren, and parents count as yours for the 5% test.¹ A founder who personally holds 3% but whose spouse holds another 4% is treated as owning 7%. Add up every family stake before assuming you qualify.

Employment Status and Plan Document Rules

The statute delays your required beginning date until April 1 of the year after the year you retire.³ There is no minimum-hours threshold. Part-time employees qualify the same way full-time employees do, as long as they remain on the sponsoring employer’s payroll. Someone who cuts back from five days a week to two still gets the deferral. The trigger is retirement, not a schedule change.

The other requirement is on the plan itself: your employer’s plan document has to allow the deferral. Most do, but the sponsor isn’t required to offer it.⁴ Read the Summary Plan Description or ask the plan administrator. If the provision isn’t there, you’ll owe RMDs at 73 even while you’re actively employed.

Some administrators ask employees to certify their non-owner status in writing, often through a form supplied by the third-party administrator. The administrator then tracks your employment status and flags when distributions must start after you leave.⁵

What the Exception Does Not Cover

The shelter is narrow. It applies only to the balance sitting inside your current employer’s qualified plan. Everything else follows the normal RMD schedule regardless of whether you’re still working.

Traditional, SEP, and SIMPLE IRAs: RMDs must start by April 1 of the year after you turn 73. Your job status is irrelevant.⁴
Old 401(k) plans from former employers: a balance you left behind at a previous employer doesn’t benefit from your current job. RMDs from legacy plans generally must begin at 73.²
Money already rolled into an IRA: once it’s in a traditional IRA, IRA rules apply permanently. Its 401(k) origin doesn’t matter.

You also cannot aggregate 401(k) RMDs across plans. If an old employer’s plan owes a distribution, it has to come from that specific plan. Traditional IRAs let you total the RMDs across accounts and pull from whichever one you choose; each employer plan’s RMD has to be satisfied on its own.⁶

Rolling Old Balances Into Your Current Plan

There is a workaround for old 401(k) money. Roll it into your current employer’s plan and it becomes part of the balance eligible for the still working exception. The catch: your current plan must accept incoming rollovers from other qualified plans. Not all of them do, so confirm this with the administrator before moving anything.

The same logic can apply to old 403(b) balances and other qualified plan funds, though the receiving plan’s rules govern what it will accept. A plan that only takes rollovers from other 401(k) plans may not accept a 403(b) transfer. This approach works best when you’re several years from retirement and want to shelter a large combined balance for as long as possible.

Money already parked in a traditional IRA is a harder case. The code generally permits IRA-to-401(k) rollovers of pre-tax amounts, but many plan documents don’t allow them. Even where they do, whether the move is worth doing depends on the IRA balance and how many working years you have left.

What Happens the Year You Retire

Once you retire, the clock starts. Your first RMD covers the year of retirement and is due by April 1 of the following year.³ Your second RMD, covering the following year, is due by December 31 of that same year.²

Your exit date matters more than you’d think. Retiring on December 31, 2026 raises a real question about whether the plan classifies that as retirement in 2026 or 2027, and the answer determines whether your first RMD year is 2026 or 2027. Plans handle year-end departures differently, so if you’re planning one, ask the administrator how they’ll code the date.

The RMD amount is calculated using the account balance as of the preceding December 31 divided by the applicable factor from the IRS Uniform Lifetime Table. The plan administrator runs the calculation, but check their math. Errors in RMD figures are among the more common plan administration mistakes.

The Double-RMD Tax Problem

Deferring the first distribution until April 1 and then owing the second by December 31 of that same year means two full RMDs land on one tax return. For someone with a large balance, that spike can push you into a higher bracket and set off several downstream effects.

The one that surprises people most is Medicare’s Income-Related Monthly Adjustment Amount. IRMAA raises your Medicare Part B and Part D premiums based on modified adjusted gross income from two years earlier. For 2026, a single filer above $109,000 (or a married couple filing jointly above $218,000) starts paying surcharges that can more than triple the standard Part B premium of $202.90 per month.⁷ Two RMDs in one year can push you past those thresholds, and the premium increase won’t hit until two years down the line.

The same spike can change how much of your Social Security benefit is taxable. Up to 85% of Social Security income becomes subject to federal tax once combined income clears the thresholds. A double-RMD year is often when that line gets crossed.

One way to soften this is to take the first RMD in the year you retire instead of waiting for the April 1 deadline. You give up a few months of tax-deferred growth but split the distributions across two tax years rather than stacking them.

Roth, 403(b), and 457(b) Accounts

Starting in 2024, SECURE 2.0 eliminated RMDs entirely for designated Roth accounts inside employer plans like 401(k)s and 403(b)s. If your contributions went into a Roth 401(k), you no longer need the still working exception for that portion of the balance. The exemption applies regardless of age or job status.

For pre-tax money in a 403(b), the still working exception works the same way as for a 401(k). If the plan permits it and you aren’t a 5% owner, you can delay RMDs on your current employer’s 403(b) until retirement.⁴ One quirk unique to 403(b) plans: you can aggregate RMDs across multiple 403(b) accounts and take the total from any one of them, unlike 401(k) plans.⁶

Governmental 457(b) plans also allow participants to delay RMDs until the retirement year, on the same general framework.

The Age Threshold Is Moving to 75

Under SECURE 2.0, the applicable RMD age rises to 75 for anyone who turns 74 after December 31, 2032.³ If you were born in 1960 or later, your starting age is 75. The still working exception operates the same way, just on a later timeline.

What It Costs to Get This Wrong

Miss a required distribution and the IRS charges a 25% excise tax on the shortfall between what you should have withdrawn and what you actually did.² A missed $20,000 RMD is a $5,000 penalty on top of the ordinary income tax you still owe when the distribution eventually goes out.

The penalty drops to 10% if you fix it within a defined correction window. That window runs until the earliest of the date the IRS mails a deficiency notice, the date the tax is assessed, or the last day of the second tax year after the year the penalty applied.⁸ To get the reduced rate, take the missed distribution and file Form 5329 reporting the additional tax inside that window.

A full waiver is also available if the shortfall was due to reasonable error rather than neglect. Attach a letter to Form 5329 explaining what happened and what you’ve done to correct it.⁹ The IRS grants these waivers routinely when the explanation is credible and the distribution has already been taken. Where people get in trouble is assuming the still working exception applies when it doesn’t, most often through family attribution that pushes them over 5%, or through old plans they’ve forgotten still hold a balance.

1
Legal Information Institute. 26 USC 416(i)(1) – Definition: 5-Percent Owner
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
4
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
5
Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Timely Start Minimum Distributions
6
Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
7
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
8
Internal Revenue Service. Instructions for Form 5329 (2025) – Section: Part IX Additional Tax on Excess Accumulation in Qualified Retirement Plans
9
Internal Revenue Service. Instructions for Form 5329 (2025) – Section: Waiver of Tax for Reasonable Cause