How a Business Owner With $1.2 Million in a 401(k) Legally Avoids RMDs
How a Business Owner With $1.2 Million in a 401(k) Legally Avoids RMDs
David BerenWed, April 1, 2026 at 4:11 PM UTC
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ANDREI ASKIRKA / Shutterstock.com (ANDREI ASKIRKA / Shutterstock.com)Quick Read -
A $1.2 million 401(k) balance faces a first-year RMD of $45,283 at age 73, which triggers ordinary income taxation and can push Medicare IRMAA surcharges by $1,148+ annually via a two-year lookback rule.
Business owners can eliminate RMDs before age 73 either by converting to a Roth account before RMDs begin (paying tax now at controlled rates) or by qualifying for the still-employed exception (5% or less ownership) and consolidating old employer plans into the current plan to delay all RMDs until actual retirement.
A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.
A business owner at 58 with $1.2 million in a 401(k) faces a decision most retirement planning frameworks miss: how to legally eliminate required minimum distributions before they begin, not manage them after the fact. Two mechanics make this possible, and they work differently depending on whether the account owner wants to act now or defer the problem.
The RMD Math That Motivates the Strategy
Under current law, RMDs generally begin at age 73, with the starting age scheduled to rise to 75 for those born in 1960 or later. The IRS Uniform Lifetime Table assigns a distribution factor of 26.5 at age 73. On a $1.2 million balance, that produces a first-year RMD of roughly $45,283, which counts as ordinary income in the year taken.
The withdrawal itself adds to taxable income and can trigger secondary effects. Traditional 401(k) withdrawals are taxed as ordinary income, and for single filers, above $ 34,000, and for joint filers, above $44,000, up to 85% of Social Security benefits become taxable. Separately, 2026 IRMAA surcharges begin at $109,000 MAGI for single filers, adding $1,148 per year in Part B and Part D surcharges at Tier 1, with the surcharge rising to $2,886 at Tier 2 ($137,001 to $171,000). A business owner with modest Social Security income and a $45,000 RMD can cross those thresholds without realizing it, paying an effective marginal rate well above their stated bracket.
Read: Data Shows One Habit Doubles American’s Savings And Boosts Retirement
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
Strategy One: Systematic Roth Conversion Before RMD Age
Converting pre-tax 401(k) balances to a Roth account before RMDs begin eliminates the mandatory withdrawal requirement entirely on converted amounts. This approach triggers a tax liability in the year of conversion and eliminates RMDs on converted amounts going forward.
Conversion is generally considered more favorable when the current marginal rate is lower than the expected future rate, or when the conversion amount fits within a controlled bracket. The 2026 federal income tax 22% bracket runs from $50,401 to $105,700 for single filers and $100,801 to $211,400 for married filing jointly. A business owner with $60,000 in other income who converts $45,000 per year stays within the 22% bracket and avoids crossing the first IRMAA threshold at $109,000 for single filers.
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The IRMAA trap matters because of the two-year lookback. IRMAA uses income from two years prior to determine Medicare surcharges, meaning a 2026 conversion affects 2028 premiums. A conversion that pushes MAGI from $108,000 to $112,000 costs $1,148 in additional Medicare premiums per person starting two years later, a recurring cost that compounds if the conversion is repeated annually.
A post-SECURE 2.0 option: Roth 401(k)s no longer require RMDs during the account owner's lifetime, effective 2024. Converting or rolling to a Roth 401(k) rather than a Roth IRA can preserve employer plan protections while still eliminating RMDs. Employer plan protections include stronger creditor protection under ERISA in most states, which matters for a business owner with liability exposure.
Strategy Two: The Still-Employed Exception and the Consolidation Move
The second path does not require paying taxes now, as a retirement plan account owner can delay taking RMDs until the year in which they retire, unless they are a 5% owner of the business sponsoring the plan. That last clause is the catch most business owners hit: if they own more than 5% of the sponsoring employer, the still-employed exception does not apply.
The exception applies to owners with 5% or less. A business owner who restructures ownership, brings in partners, or operates through an entity structure where direct ownership falls to 5% or below can qualify. The plan document must also permit the delay, so confirming with the plan administrator is required.
A consolidation approach is also available. The still-employed exception only applies to the current employer's plan. A business owner who rolls old 401(k)s from prior employers into their current plan can consolidate all funds under the exception and delay everything. A business owner with $800,000 in a current plan and $400,000 across two prior employer plans can roll those balances into the current plan. If the still-employed exception applies, all $1.2 million falls under it. Without the rollover, the $400,000 in prior-employer plans generates RMDs regardless of employment status.
Implementation Considerations -
Verify ownership percentage and plan document language. The still-working exception requires the plan document to explicitly allow delayed RMDs for working participants who own 5% or less of the business. Check both conditions before assuming the exception applies.
Model IRMAA before converting. If the combined income, including conversion amounts, will exceed $109,000 (single) or $218,000 (joint) based on 2024 income (which determines 2026 Medicare premiums via the two-year lookback), calculate the exact IRMAA tier cost before committing to a conversion amount. The difference between MAGI of $108,000 and $110,000 is $1,148 per person per year in recurring surcharges.
Roll prior-employer 401(k) balances into the current plan before age 73 if the still-employed exception applies or is expected to apply. Once RMDs begin under a prior employer's plan, they cannot be retroactively eliminated by a subsequent rollover.
Data Shows One Habit Doubles American’s Savings And Boosts Retirement
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
And no, it’s got nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much more straightforward (and powerful) than any of that. Frankly, it’s shocking more people don’t adopt the habit given how easy it is.
Source: “AOL Money”
