For individuals aged 73 who remain in the workforce, a notable distinction exists between their current employer's 401(k) plan and other retirement accounts like traditional IRAs concerning Required Minimum Distributions (RMDs). While conventional IRAs mandate withdrawals upon reaching a certain age, the 401(k) associated with ongoing employment offers a unique deferral. This allows accumulated funds to continue growing without mandatory distributions until the individual formally retires. This extended compounding period presents a valuable opportunity for wealth accumulation, making strategic investment choices within these accounts particularly crucial. Leveraging this exception can significantly enhance long-term financial security.
The Internal Revenue Service (IRS) provides a 'still-working exception' that permits employees participating in a workplace defined contribution or profit-sharing plan to postpone RMDs from that specific plan until their retirement year. This rule, however, is not universally applicable. It does not extend to Traditional, SEP, or SIMPLE IRAs, nor does it apply to plans from previous employers; the exception is tied directly to the individual's current employment. Additionally, business owners exceeding certain IRS ownership thresholds may not qualify for this deferral. It is also possible to consolidate old 401(k) balances into a current plan to benefit from this exception, provided the plan document permits rollovers and delays. Confirming these details with a plan administrator is an essential step before any fund transfers. It is important to remember that this exception merely delays the withdrawal obligation, it does not eliminate it. Upon retirement, a substantial pre-tax balance can lead to a significant initial withdrawal, necessitating careful planning to mitigate potential tax implications.
To capitalize on this extended growth period, a diversified portfolio of Exchange Traded Funds (ETFs) can be highly effective. The Vanguard S&P 500 ETF (VOO), which tracks the performance of the 500 largest U.S. companies, serves as an excellent foundational investment. With an exceptionally low expense ratio of 0.03% and a history of robust performance, including an 18.57% adjusted price increase over the last year and 321.54% over ten years, VOO allows the majority of returns to remain invested. Its quarterly dividends, totaling $7.35 per share over the past year, can be reinvested to further expand the capital base, making it an ideal choice if only one fund is permitted.
Complementing VOO, the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) focuses on U.S. dividend-paying companies selected for strong quality metrics such as return on equity and assets, prioritizing those with potential for consistent dividend increases. Launched in 2013, DGRW manages approximately $16.6 billion in net assets and has a 0.28% expense ratio. Its monthly distributions, which totaled $1.0177 per share over the past twelve months, can be reinvested within the 401(k) without immediate tax consequences, unlike in taxable accounts. DGRW's adjusted price has seen a 12.99% gain over the last year and 271.82% over ten years, indicating its strong growth potential.
Finally, the iShares Core MSCI Total International Stock ETF (IXUS) addresses a common oversight in many late-career portfolios: international exposure. IXUS tracks thousands of holdings across developed and emerging markets outside the United States, including companies in Canada, Japan, China, Sweden, Spain, and Israel, spanning various sectors. With around $58.4 billion in net assets, IXUS has demonstrated strong recent performance, outperforming VOO with a 22.41% adjusted price increase over the past year. Although its long-term performance, with a 10-year gain of 146.17%, lags behind VOO, it provides essential diversification against U.S.-centric market fluctuations and currency risks. IXUS distributes dividends semi-annually, with $2.80 per share over the trailing twelve months.
While the benefits of delaying RMDs in a 401(k) are significant, individuals should consider the practical aspects of their plan. Not all 401(k) programs offer direct access to ETFs, potentially requiring a self-directed brokerage window or the selection of equivalent index funds. Additionally, the inherent volatility of currency exchange rates can impact international investments like IXUS. It's also crucial to acknowledge that DGRW's quality-focused strategy, while beneficial for consistent payouts, may not always match the aggressive growth of broader market indices like the S&P 500 over extended periods. Despite these considerations, for those still earning income and whose plans allow for RMD deferral, this approach provides a unique advantage. By combining a robust U.S. core, a dividend-growth component, and global diversification, individuals can maximize their compounding time and build a substantial nest egg for their eventual retirement, ensuring a well-prepared transition into their later years.
