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Fix My Portfolio: I’m still working at 75: Do I need to take RMDs from my 401(k)? 

Dear Fix My Portfolio, 

I retired from the U.S. Postal Service in 2004 and have a yearly pension from the Office of Personnel Management (OPM). I also work part time at a big hardware chain and have a portion of my salary placed in the company’s 401(k). I have been working there for four years and have around $10,000 in the plan. I also use 20% of my salary to buy company stock. My concern is due to my age of 75, am I required to take out money as an RMD?

Sam 

Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at [email protected]

Dear Sam, 

The easy answer to your question is no—you’re not required to take money out of your current workplace plan if you’re still working. But as always with the IRS, there’s a lot more to it than that. 

If you’re still working, no matter if you’re 75 or 105, you can still contribute to the company’s 401(k) plan, and you don’t have to take money out of the account for required minimum distributions, which the IRS requires so you start paying tax on your deferred savings. You only have to start taking RMDs by April of the year after you leave that job. 

If you’re buying company stock through an employee stock ownership plan (ESOP), subject to vesting and other qualified retirement plan options, it would fall under the same rules as the 401(k) and would not be subject to RMDs until you leave the company. 

However, if you have any other deferred retirement plans, you have to take RMDs from those. So if you have a traditional IRA or 401(k) accounts at former employers, those would all count and you would have had to start taking money out of those once you turned 70 ½, because that was the rule back when you turned that age. Because of new rules that start in 2023, your younger cohorts only have to start once they hit 73, and in 10 years it will be 75. 

If all this is a surprise to you and you haven’t taken RMDs from necessary accounts yet, now’s the time to fix it—you’ll need to file some forms with the IRS, pay the amount due and ask for forgiveness on the 50% penalty. 

Pension complications

Your government pension has its own tax rules, so if that’s your only other account, then you don’t have to do more paperwork, because your calculations are done for you. 

What you do have to consider, however, is your total income for the year if you’re collecting a pension and working—and perhaps collecting Social Security—because it will greatly affect your overall tax burden. 

“Always worry about total income,” says Catherine Valega, a certified financial planner who runs the firm Green Bee Advisory in Winchester, Mass. 

For most people worrying about working part time in retirement, the big question is how your income affects the taxation of the Social Security you receive. The answer for you will depend on how your pay was structured at a postal employee over the years, because different rules may apply over time. You’d have to contact your plan administrator to find out the details of your plan. 

Some public pensions pay into a different system and your pension basically stands in for Social Security. But some of your income from your postal job, or other jobs you may have had over the years, could have qualified you for Social Security. In that case, you may be subject to what’s known as the Windfall Elimination Provision (WEP), which is basically intended to make sure you don’t double-dip with benefits and it could lessen your Social Security check. 

Just working, in general, affects the taxation of Social Security. At $34,000, the highest income level, some 85% of the benefit could be taxable. Income also affects how much you’re charged for your Medicare premiums for Part B and D

If you haven’t already qualified for Social Security because of your government benefits, you still could if you work 40 quarters, which generally works out to 10 years. Put in another six years, and you’ll be there, at 81, collecting for the first time.

“Our tax code is so convoluted, you really need to work with somebody to plug all your numbers into tax software,” says Valega. 

If it’s starting to seem like your part-time job isn’t worth it for all the tax complications, think about what else it brings to your life. 

“There are other benefits to working—it’s adding a little extra income and it keeps you younger and healthier,” Valega says. 

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