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Ask SmartMoney: How Does Employment Affect Required Minimum Distributions From a 401(k)?

“Ask SmartMoney” is a regular feature in SmartMoney magazine where experts answer readers’ personal finance questions.  Since the magazine gets more questions than it can tackle, we’re answering some of the retirement-related inquires on “Encore.”  We’re also taking new questions, which you can submit by commenting on this story.

This week, we answer the following question from Rosemary Evans of Broomfield, Colorado.

Q: Do I have to start taking required minimum distributions from my 401(k) even if I’m still working at age 70 1/2?

A: Probably not. Most 401(k) plans let you delay taking the required minimum distributions until the year you retire, says Graydon Coghlan, the president and CEO of San Diego-based Coghlan Financial Group. However, there are some exceptions:  If you own more than 5% of the company, you will have to take the required minimum distributions even if you are still working.  And “the ‘still working’ exception only applies to your current employer,” Coghlan says, which means if you have 401(k)s parked in a former employer’s plan, you’ll have to take distributions at age 70 1/2 from it. (Don’t want to? Roll them into your current 401(k) plan.) To verify whether your plan allows this “still working” exception and how it works, contact the company that runs your plan.

IRAs are a different story. You’ll almost surely have to take the required minimum distributions even if you’re still working, says Coghlan.  However there’s one big exception to this rule: The Roth IRA does not require the owner to take minimum required distributions at any point during his or her lifetime. “It is one of the great advantages of the Roth IRA,” says Julia Valentine, author of “Joy Compass: How to Make Your Retirement the Treasure of Your Life.” To learn more about required minimum distributions, click here.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.