How a Business Owner With $1.2 Million in a 401(k) Legally Avoids RMDs

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 decision.

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.

That withdrawal does not arrive in isolation. It stacks on top of other income and can trigger secondary costs that many retirees underestimate. For single filers, once income exceeds $34,000, up to 85% of Social Security benefits become taxable; the threshold for joint filers is $44,000. 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. Cross into Tier 2 (between $137,001 and $171,000) and that surcharge climbs to approximately $2,885 per year. 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.

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. The conversion triggers a tax liability in the year it is executed, but Roth accounts face no RMDs during the account owner’s lifetime, so the tradeoff is paying taxes now to eliminate a recurring obligation later.

Conversion is generally more favorable when the current marginal rate is lower than the expected future rate, or when the conversion amount fits within a controlled bracket. Per IRS Rev. Proc. 2025-32, the 2026 federal income tax 22% bracket runs from $50,400 to $105,700 for single filers and from $100,800 to $211,400 for married filing jointly. A business owner with $60,000 in other income who converts $45,000 per year stays comfortably inside the 22% bracket and avoids crossing the first IRMAA threshold at $109,000 for single filers. It is also worth noting that the One Big Beautiful Bill, enacted in 2025, made the TCJA income tax structure permanent, removing the prior uncertainty about post-2025 rate increases and making multi-year conversion planning more predictable.

The IRMAA trap demands particular attention because of the two-year lookback. IRMAA uses income from two years prior to determine Medicare surcharges, so a 2026 conversion affects 2028 premiums. A conversion that pushes MAGI from $108,000 to $112,000 adds $1,148 in Medicare surcharges per person starting two years later, a recurring cost that compounds with each annual conversion.

A post-SECURE 2.0 option worth considering: Roth 401(k)s no longer require RMDs during the account owner’s lifetime, effective 2024. Converting or rolling into a Roth 401(k) rather than a Roth IRA can preserve employer plan protections while still eliminating RMDs. Those protections include stronger creditor shielding under ERISA in most states, which carries real weight for a business owner with personal liability exposure.

Strategy Two: The Still-Employed Exception and the Consolidation Move

The second path requires no upfront tax payment. Under IRS rules, a workplace retirement plan participant can delay RMDs until the year in which they actually retire, with one critical carve-out: the exception does not apply to anyone who owns more than 5% of the business sponsoring the plan. That clause is the catch most business owners encounter the hard way.

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 explicitly permit the delay, so confirming both conditions with the plan administrator is essential before relying on the exception.

Consolidation adds another layer of planning value. The still-employed exception covers only the current employer’s plan. A business owner who rolls old 401(k) balances from prior employers into the current plan brings everything under one umbrella and under one exception. Consider an owner with $800,000 in a current plan and $400,000 split across two prior employer plans. Rolling those balances into the current plan means, 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, creating a tax liability the owner could have avoided.

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.

Editor’s note: This article corrects the 2026 federal income tax 22% bracket lower bound to $50,400 for single filers and $100,800 for married filing jointly, per IRS Rev. Proc. 2025-32, and updates the Tier 2 IRMAA annual surcharge figure to approximately $2,885. It also adds context that the One Big Beautiful Bill, enacted in 2025, made the TCJA income tax structure permanent.