Can I Still Contribute to My 401(k) as a Part-Time Employee?
By Sarah Brenner and Beverly DeVeny
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This week's Slott Report Mailbag discusses complex retirement planning topics with a charitable uncle interested in leaving his Roth IRAs to his grandnephews and nieces and an employee moving to part-time work who is still interested in contributing to his 401(k). As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
I'm a 70-year-old single person, in declining health, with several Roth conversion IRAs that have been funded with my 457(b) retirement plan over each of the last five years. Each yearly conversion Roth IRA was placed under a separate account number. I'm considering naming my grandnephews and nieces, who are all under 10 years old, as beneficiaries for these IRAs so they can use these funds for their future educational needs. Considering the 5-year rules, will their required minimum distributions (RMDs) be totally tax free or somewhere in between? Are there any pitfalls to avoid with this idea?
Thank you for your help.
You sound like a generous uncle. Any funds that you converted from your 457(b) plan would be distributed from the inherited Roth IRAs tax free. These funds would be considered to be distributed first. Any earnings in the Roth IRAs would be distributed last. The earnings would be tax free as long as more than five tax years have passed since your first contribution or conversion to any Roth IRA. This five-year period does not restart with subsequent conversions. Bottom line, if more than five years have already passed since you did your first conversion from your 457(b) plan, your grandnieces and nephews will be able to take distributions from their inherited Roth IRAs tax and penalty free for higher education or any other reason.
There are two things for you to keep in mind. First, your grandnieces and nephews will have required distributions beginning in the year after your death. They cannot wait until they go to college before taking a distribution. Second, minors cannot set up and manage inherited retirement accounts. You may need to set up a trust for the grandnieces and nephews, which would be the beneficiary of the IRA. You should consult with an advisor who has expertise in both the Roth IRA rules and passing assets to minors.
If I continue to work part time after age 70, can I still contribute to a 401(k) plan? If I am able to contribute, will this still allow me to delay taking RMDs on my 401(k)?
There is nothing in the law that prohibits you from making 401(k) contributions after you reach age 70 ½. However, your eligibility will ultimately be determined by the terms of the 401(k) plan. You mention that you will be working part time. Many company plans limit eligibility for part-time employees. Check with your employer to see what the rules are.
You may also want to check with your employer to determine whether you can delay taking RMDs. Continuing to contribute to the plan will not allow you to delay your RMDs, but something called the “still working exception” might.
Here is how it works. If you are still working for the company where you have the 401(k), and you don’t own more than 5% of the company and the plan allows, you can delay your RBD to April 1 of the year following the year you finally retire. This provision is optional on the part of the plan. They are not required to have a "still working exception."
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