If you own an S corporation that offers a 401(k), what are your rules when it comes to required minimum distributions (RMDs) if you are still working past age 73?

This is a question posed by a reader, who said she and her husband own 100% of an S company. "[My husband] will be 73 next year," she said. "Does he need to start his RMD on his solo 401(k) next year?" A solo 401(k) is a "traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse," according to the IRS website (tinyurl.com/2epc4j2b).

While I can offer a general overview, anyone in the reader's situation will need to consult with his or her tax adviser before taking action to be sure to avoid potential tax penalties -- each individual's tax situation is unique.

First, some background. Internal Revenue Code Section 401(a)(9)(C) sets out the rules for starting RMDs. The required beginning date (RBD) for employees to begin taking RMDs is "April 1 of the calendar year following the later of (I) the calendar year in which the employee attains applicable age, or (II) the calendar year in which the employee retires" (tinyurl.com/5b737t2d). That age is now 73, after the passage of SECURE Act 2.0 in 2022.

Translation: Even if you are 73 or older, you can delay taking an RMD from a 401(k) administered by your current employer as long as you are still working for that company -- but not in all cases; there are exceptions to this rule.

One exception affects the reader. Quoting IRS Pub. 575, "If you are a 5% owner [of the 401(k)'s sponsor], you must begin to receive distributions from the plan by April 1 of the year that follows the calendar year in which you reach age 73."

What defines a 5% owner? According to Pub. 575, "You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 73, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer."

The 5% rule applies to the reader's S corporation. Since the husband and wife together own 100% of the S corporation, the participant is considered as owning more than 5%. As a result, he must start RMDs at age 73 whether or not he continues working, according to Mark Luscombe, principal analyst at Wolters Kluwer Tax and Accounting.

The reason? "Ownership of the S stock owned by the spouses is attributed to each other," Luscombe explained. "Therefore, in this example, each would be considered to own 100% of the S corporation" for purposes of the RMD.

This rule applies to pre-tax 401(k)s. There is another exception that needs to be understood if the 401(k) is a Roth. "Under prior laws, RMDs were required to commence even for Roth 401(k)s at age 73," Luscombe said. "However, starting in 2024, RMDs are no longer required from Roth 401(k) accounts until the death of the participant."

Let me add a note on solo 401(k)s. A business owner "wears two hats in a 401(k) plan: employee and employer," quoting the IRS page. "Contributions can be made to the plan in both capacities."

Those capacities include elective deferrals (with a limit of $23,000 in 2024, or $30,500 if age 50 or over), and employer nonelective contributions. However, the total contributions (not counting catch-up contributions for those 50 and over) can't be more than $69,000 for 2024.

Again, for anyone in this reader's situation, consult your tax adviser. You don't want to be assessed an IRS penalty for failing to take your RMDs in a timely manner (up to 25% of the amount not taken; see tinyurl.com/yc7au55k for more details).

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Mortgage rates may be declining, which puts new homebuyers in a better position than just a year ago (tinyurl.com/5ykwr6cx).

The 30-year fixed-interest rate mortgage hit a high of 7.79% in late October 2023; now, we're seeing this type of mortgage at an average of 6.38% (forecast for the fourth quarter of 2024).

If you bought a home last year, it's probably too soon to think about refinancing, but have you considered the benefit of making extra payments to lower your interest amount and shorten the term of your loan?

The good news is that mortgage amortization calculators are available online, so you can test making extra payments to see the benefits that can result.

Thanks to the mathematics of compounding, you don't have to make big sacrifices to make a significant impact on your debt.

Here is an example, using an online mortgage amortization calculator (in this case, I'm using one found at calculator.net -- tinyurl.com/2a6ec225).

Say you have a 30-year fixed-interest mortgage at 5.5% with a balance of $250,000. Your regular payments would be $1,419.47. In 30 years (Oct. 1, 2054), you will have made 360 payments of $1,419.47 for a total of $511,010. Of that amount, you would have repaid the $250,000 loan and paid the bank interest of $261,010.

What if you added just $100 extra to that monthly mortgage payment each month, making it $1,519.47? You would pay off your $250,000 debt four years and five months earlier, saving yourself $44,877 in interest payments.

Of course, the more you add as an extra payment, the bigger your savings.

If you were able to make an extra payment of $500 a month ($1,419.47 plus $500), you would save 13 years and five months of payments and $129,580 in interest payments. Your total interest payments would be reduced from $261,010 to $131,430.

Another alternative is to make occasional payments. Say you receive an annual bonus check each January. For the next three years, each January, you pay an extra $10,000 to the bank. That cuts approximately $90,000 off your interest payments and saves you seven years off your loan, so that your loan would be fully paid by October 2047, using the Extra Payments Calculator provided by Freddie Mac (tinyurl.com/3h477rxa).

But, if you wait to use those $10,000 bonus payments until January 2034, 2035 and 2036, your savings will be about one-half less -- only $48,860, saving you four years and seven months instead of seven years in the earlier example, illustrating the time value of money.

You will probably find a good prepayment calculator at your bank's website. If not, you can call your bank to ask them to illustrate some prepayment options for you considering your particular loan.

Worth considering? Absolutely. Lowering your personal debt is the name of the game in today's financial marketplace. Making small sacrifices today can reap huge savings over the long term.

Who shouldn't make extra payments? Someone with high-interest-bearing consumer debt. If you are carrying credit card debt at high interest rates, pay that off first. Then tackle your mortgage.

Who else? If by chance you are not contributing to your 401(k) plan at work even though it has a match (I hope that's not you), it's better to put extra cash at work there first. If you think you don't have extra cash for your 401(k), but you get a tax refund check from Uncle Sam every year, send me an email at readers@juliejason.com. I'll show you how to claim that extra money (your match) without reducing your take-home pay.

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There is a big change looming for the federal estate tax exemption after 2025 unless new legislation emerges -- a topic we discussed in this column in 2022. We are two years closer, and the time to plan (and potentially act) is now if you are a high-net-worth individual. What we're talking about here affects people who are in the lofty reaches of wealth, affecting likely only 1% of the population.

For deaths occurring in 2024, estates worth less than $13.6 million pass to heirs free of federal estate taxes. Estates worth more are taxable.

That exemption amount will drop dramatically in 2026, but there may be some ways to avoid or lessen the impact.

First, some background: The Tax Cuts and Jobs Act (TCJA) of 2017 brought a large increase in the estate exclusion amount -- from $5.49 million per person in tax year 2017 to $11.18 million in tax year 2018 (tinyurl.com/4h5yu88y). Yearly inflation adjustments have increased the exemption amount to the current 2024 level of $13.61 million. As of this writing, the exclusion amount for 2025 has not been announced.

However, the TCJA was not designed to be permanent. In 2026, the exclusion amount "is due to revert to its pre-2018 level," quoting the IRS Estate and Gift Tax FAQs (tinyurl.com/yc4ahmva).

The inflation-adjusted exemption for 2026 will, "barring action by Congress ... revert to approximately $7 million per individual, adjusted for inflation," according to the Northern Trust Institute report "Are You Prepared for Sunsetting Estate Tax Exemptions?" (tinyurl.com/49tskp8j). The Northern Trust Institute is a research center.

In other words, an estate that is fully exempt from federal estate taxes in 2025 can be subject to federal estate taxes in 2026. If you are in that situation (an estate worth $7 million or more), it's time to do some serious planning to see if there is a way to take advantage of the current exemption of over $13 million before it disappears.

What sort of planning? That usually calls for wealth transfer (gifting) considerations to reduce the size of the estate.

More background: The federal gift tax exemption has a relationship with the federal estate tax exclusion.

"The federal gift tax exemption is unified with the federal estate tax exemption, meaning that ... individual[s] can use part of lifetime gift tax exemption to make taxable gifts during their lifetime and the remaining portion to shelter their estate from federal estate tax after they pass away," according to the law firm Husch Blackwell LLP in "Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions" (tinyurl.com/u2sv3w76). "Whenever a portion of the federal gift tax exemption is used, the amount must be reported to the IRS on a Form 709 (Gift Tax Return) the following year."

A natural question is whether wealth transfer in advance of 2026 will cause you to lose the benefit of current exclusion amounts if the threshold decreases after 2025. The answer is no.

According to the IRS Estate and Gift Tax FAQs: "[P]eople planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases."

If you are examining your estate plan, what should you be considering with 2026 not that far away?

For starters, don't wait. Wealth transfer planning takes time and attention from your estate planning lawyer, working together with your money manager and accountant. It makes sense to begin soon to be ahead of the actual change in the law that takes effect in 2026.

Second, be prepared. If you are a high-net-worth individual, with 2026 just around the bend, have your money manager prepare you for meeting with your attorney. The attorney should already have your trusts and estate planning documents and knowledge of your family structure. Your money manager should prepare separate net-worth statements for you and your spouse, a list of your holdings and titling of assets, cash flow assumptions to plan for current and projected living expenses and a history of charitable gifting. That will save you and your lawyer some time and effort and open up planning opportunities.

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