Employer sponsored retirement plans offer automatic retirement savings and tax deductions while you are employed. However, the money accumulated in a 401(k) retirement plan can not continue to accrue tax-deferred indefinitely. The Internal Revenue Service requires that distributions be taken from 401(k) accounts and the taxes which were deferred while you were employed be paid in retirement.
Required Minimum Distributions
After you turn 70.5 years old, the IRS requires you to start withdrawing money from your 401(k) account. These distributions are referred to as Required Minimum Distributions or RMDs. The IRS also dictates the minimum amount you must withdraw using a formula based on your account balance and life expectancy. IRS Publication 590 details how to calculate this amount. If you do not withdraw at least the required minimum, you will be subject to a 50 percent excise tax on the amount you didn't withdraw as required.
Contributions and the Age 70.5 Rule
The IRS prevents contributions to your traditional IRA once you reach age 70.5 or after. Usually, once you begin to take the RMD for your employer sponsored 401(k) you cannot contribute any more money to it. If you reach 70.5 and have not yet retired, you and your employer are still allowed to make contributions to your 401(k) account. However, the mandatory distribution requirement for that particular 401(k) account is waived.
Roth 401(k) Accounts
Roth 401(k) accounts follow different rules than a traditional IRA. All Roth accounts take contributions made with after-tax money, so the contributions are not tax-deductible and distributions, when made in accordance with IRS rules, are not taxed. Roth 401(k) accounts do not require distributions during the lifetime of the account holder. So if you have a Roth 401(k) you can make contributions and take distributions both in the same year, but neither is required by the IRS, even after you reach 70.5.
Contributions or Distributions
Except for certain IRA plans, such as Roth accounts and SEP-IRAs, the IRS allows either contributions or distributions after 70.5, but not both. Though the IRS waives RMDs for your employer-sponsored 401(k) account if you are still working, you will still need to start taking distributions from non-employer sponsored IRA accounts. Your employer may also have rules in place regarding contributions and distributions from your account, so be sure to check your plan information before deciding on a course of action.
- "Internal Revenue Service": Publication 590
- "Kiplinger's Personal Finance"; RMD Rules for Retirees; Kimberly Lankford; February 2010
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Mar. 4, 2020.
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed Mar. 4, 2020.
- Internal Revenue Service. "Retirement Topics - Significant Ages for Retirement Plan Participants." Accessed Mar. 4, 2020.
- Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules." Accessed Mar. 4, 2020.
- Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed Mar. 4, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed Mar. 4. 2020.
- Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions." Accessed Mar. 4. 2020.
Ericka Kahler earned her first writing award in 2004 and since has gathered a wealth of experience writing for the financial industry. She is the editor of the book “Stories and Poems? We're All Forum: The Best of the Northwest Ohio Writers' Forum." Kahler earned a bachelor's degree in history from the University of West Florida.