I appreciate it when reputable financial advisors fight for their clients. It is a pleasure to see a well-educated, experienced professional leave no stone unturned when it comes to helping someone through a problematic situation. Such conversations can be inspiring. “What if we try this? What if we tried that?” If a creative path to a desired outcome exists within the rules, I will diligently help the advisor map out a route while simultaneously pointing out the tripping hazards. In my February 24, 2025, Slott Report entry, I wrote about IRA detours and alternate routes. Today, we run into road closures.
Sometimes, there is no path forward. On occasion, all roads lead to dead ends. Recently, I traded emails with a respected advisor. Previous communications demonstrated this individual to be someone who understands some of the more complex IRA rules and strategies. In this situation, he was searching for any possible angle to help his client with an $8 million 401(k) avoid taking required minimum distributions (RMDs).
Our first email exchange centered on the still-working exception. For those who have a 401(k) or other employee retirement plan, the required beginning date (RBD) for RMDs is the same April 1 as for IRA owners, unless they are still working for the company where they have the plan. If the person does NOT own more than 5% of the company (and the plan allows), he can delay his RBD to April 1 of the year following the year he retires. The client in question was still working, but he was a more-than-5% owner. Therefore, he could not use the still-working exception on his current plan. Dead end.
The next stone the advisor flipped was an idea to transfer the 401(k) into another retirement plan that accepted rollovers. The client was not a 5% owner of the company sponsoring the other plan. Success! The client could delay RMDs on any dollars he moved into this plan! Not so fast. The client explicitly wanted to do Roth conversions over the next few years. The other plan did not allow in-plan Roth conversions. Also, the client wanted his entire $8 million in the hands of a specific money manager only available within the current 401(k). Dead end. (Yes, he could do partial rollovers back to the 401(k) or to an IRA for conversion, but that was not what the client wanted.)
Now things began to get interesting. Our conversation turned back to the still-working exception and the “more that 5% ownership test.” The still-working exception does not apply to an individual who owns more than 5% of the company in the year the individual turns age 73. This is a one-time determination. If the individual is a more-than-5% owner in that year, he will never be able to use the still-working exception on that plan. Such is the case even if he no longer owns more than 5% of the company at some point in the future. (Family aggregation rules apply in determining the percentage.)
The advisor considered terminating the 401(k) in the year the client turned age 73 and then opening a new plan in the future. No deal. The same business entity still existed, and it was already determined that the client was a more-than-5% owner. Dead end.
Next, the advisor shared an article he found which suggested the possibility of closing the actual business and then establishing an entirely new business entity to skirt the age 73 ownership test year. Within that article, the author used phrases like “would appear to work” but “the IRS has never formally blessed this planning technique.” Red flags. Best not to pursue this angle. Dead end.
Ultimately, when I get an uneasy feeling in my gut, I know it’s the end of the road. I told the advisor that I could not bless these latest strategies. I told him I respected his efforts on behalf of his client. I asked if he also felt that knot in his belly. (Based on his stellar record, I knew he did.) Yes, we hit a dead end, but at least we exhausted all possibilities. His client can rest easy knowing this advisor did everything in his power to find a legal workaround. But based on client needs, there were none. RMDs apply.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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