20 Feb The rules for RMDs if you’re still working

 Q. I’m not sure if this relates to 401(k) plans, 403(b) plans or both: I was under the impression that if you were over 70 1/2 but still employed at the company that you did not have to take any deduction for a Required Minimum Distribution (RMD) until the year you left the company. I also thought that one could transfer the contents to an existing rollover IRA upon leaving work. Can you clarify?

A. Before we answer your question, let’s discuss the differences among 401(k)s, 403(b)s and IRAs.

Both 401(k) and 403(b) plans are tax-deferred retirement plans, and the names simply refer to the section of the tax code that outlines the plans, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“You contribute part of your salary to the plan on a pre-tax basis,” he said. “Pre-tax means you do not pay taxes on portion of your salary you invest in the plan.”

So an immediate benefit of both plans that you get a current tax savings, and whatever you contribute lowers your taxable income for the year in which you made the contribution.

The main difference between a 401(k) and a 403(b) is type of employer who can offer them, Kiely said. (You can read about Roth options here.)

“Unlike 401(k) plans which are offered by for-profit companies, 403(b) plans are only available to employees of tax-exempt organizations,” he said. “These are usually either schools, hospitals or religious groups.”

Governmental regulations and rules for 403(b) plans are much simpler than for 401(k) plans offered by for profit companies, he said.

“The rules are simpler for 403(b) plans because non-profits do not have large administrative budgets,” he said. “Both types of plans offer various mutual funds as investment alternatives, although 403(b) plans, which are frequently through insurance companies, usually offer annuities as an investment option.”

The contribution limit for both types of plans is $18,000 for 2015. If you are 50 or over, you can contribute an additional $6,000.

Kiely said the other benefit is that earnings grow tax-deferred until they are withdrawn.

If you leave your employer, both types of plans can be rolled over into a IRA account.

“I generally recommend rolling over 401(k) and 403(b) plans because IRA plans offer more investment alternatives, are cheaper to manage and there is less red tape involved,” Kiely said. “Plus, having one large IRA is better than having numerous retirement plans at numerous prior jobs.”

Now, when do you have to take withdrawals?

For employer sponsored plans, such as a 401(k) or 403(b), Required Minimum Distributions begin April 1 following the year you reach 70½ or the year after you retire, whichever is later, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.

“If you are still working at age 70½, but are also a 5 percent or greater owner of the company, this rule does not apply and you will need to take an RMD,” Williams said.

She said it’s important to note that this only applies to employer sponsored plans. With regards to an IRA, it does not matter if you are working or not. RMDs must commence by April 1 following the year you reach 70½.

If you have multiple accounts, read this to understand how to calculate your RMD.

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This story was first posted in February 2015.