Author Topic: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule  (Read 8638 times)

marouxlas

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We are starting to follow the MMM approach. I am currently 40 aiming to retire at 55. I work at a state university that offers the option of both 403b and 457b and I can contribute up to 17.5k per year in each of these accounts. I also have a typical work retirement plan on top of that.
For the 403b I can only contribute pre-tax dollars invested with TIAA. For the 457b I can choose between pre or after tax and probably invest with Vanguard.
Here are my questions:
1. Should the 457b have after-tax contributions (Roth type)? Since I cannot touch the pre-tax dollars in my work retirement plan or the 403b before 59.5 y.o. I was thinking I could use the principal of the roth 457b to bridge the gap between my retirement target age (55) and the IRS rules (59.5 y.o.). Can you think of other ideas for that 4-5 year period?
2. Would there be any circumstances that you would not recommend maxing out the 403 and 457 plans (using their tax benefits) and instead invest in a taxable account? Both plans have pretty good investment choices and low cost index funds.
3. Since I have no option but to split my investments between TIAA and Vanguard do you know if I contact one of them if they could provide advice on asset allocation for my entire portfolio?
Thanks in advance.

nordlead

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #1 on: September 03, 2014, 10:43:43 AM »
This is a non-problem.

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Early retirement. You can take penalty-free withdrawals from a 401(k) if you are at least age 55 in the year you retire and if you leave your money in your former employer's plan. (If you roll the money into an IRA, however, the 59 age rule kicks back in.) However, not all employers allow this option. You also can access 403(b) money penalty-free if you retire at 55.

Just make sure there aren't extra restrictions on the account.

As for total portfolio allocation, TIAA-CREF has a 360 view thing that will look at your vanguard account. They also have people to talk to that will take into account other retirement accounts. I'm not sure about Vanguard. Honestly, this has never been a concern of mine since I follow a simple 4-fund portfolio. Total US Stock, Total International Stock, Total US Bond, TIAA Real Estate. It isn't that hard to balance the 4 types of holdings between TIAA and Vanguard. Since my TIAA accounts are much bigger than my Vanguard accounts I really just balance the holdings in my TIAA account and my Vanguard accounts are 100% Total US Stock.

sandandsun

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #2 on: September 03, 2014, 11:00:45 AM »
I'm in your exact situation (so is my wife) and we have both been maxing 403 and 457 for several years along with Roths...
Here's the deal, when you leave employment with your university (completely, not just downshifting to another job  with them) you can take the 457 money since it's deferred compensation... Even if it is pretax money (all of ours is) you will just pay tax but no penalty... It's a different animal than a 401/403...



sandandsun

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #3 on: September 03, 2014, 11:11:36 AM »
Also meant to say, tiaa will provide a personal wealth advisor that will create a personalized plan that takes all of your outside accounts into consideration.  I don't know the threshold for this service, but it may be for those closer to the 7 figure mark...  Ask for a personal review, don't just meet with the assigned advisor who comes for 30 minute chats every few months (if it's like the system we have)...

marouxlas

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #4 on: September 03, 2014, 11:30:23 AM »
Thanks for the replies. So I can use funds from the 457 when I leave my employer independently from my age, which is great news.

Would you suggest I invest in pre- or after-tax for my 457? one school of thought is to balance pre and after tax planning since I cannot predict my tax bracket in retirement but considering the no penalty early withdraw of the 457 it is too tempting to contribute only pre-tax. Any thoughts?

Also, how is the "personal weath advisor" different than the assigned advisor? Are they more knowledgeable and would they meet with you in person or over the phone? Do you just call TIAA to make this request?
Thanks.

sandandsun

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #5 on: September 03, 2014, 11:53:34 AM »
You have to request it, then you'll have an initial info gathering meeting, they'll prep a pretty in depth plan for you that takes into account your anticipated retirement date etc....   It's worth it to see the big picture, and they'll give advice on how to tweak allocations, etc...
I only have the pre-tax option for my 457 so I've never investigated the pros cons... I would probably do that anyway to lower current tax bill and since I plan to withdraw an amount that will put me in a lower bracket in ER... I'm planning to use 457 and Roth principle (if needed) for the years before I hit 60 and can access the 403/401's...
Good luck! Having access to regular retirement account, plus match, plus 403, plus 457, plus Roth is a sweet situation... Take advantage of it : )

marouxlas

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #6 on: September 10, 2014, 06:02:06 AM »
Thank you for the feedback. So the plan is to max out my 403b, 457b and then add to a Roth IRA. I believe I can add up to 17.5k to the 403b, 17.5 to the 457b and 5.5k to the Roth IRA (I am under 50 yo). I am also receiving a retirement plan from work.

My question: is there a maximum limit for my total retirement contributions?

Jellyfish

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #7 on: September 10, 2014, 07:27:46 AM »
For those of us who do not have access to 403b or 457b plans and who plan to retire before age 55, am I correct in assuming there is no way to circumvent the 59.5 age for IRA and 401(k) withdrawals without penalty? 

The vast majority of my retirement savings are in these types of plans so my primary issue is determining how to live from ER date (50) until 59.5. 

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #8 on: September 10, 2014, 07:34:03 AM »
For those of us who do not have access to 403b or 457b plans and who plan to retire before age 55, am I correct in assuming there is no way to circumvent the 59.5 age for IRA and 401(k) withdrawals without penalty? 

The vast majority of my retirement savings are in these types of plans so my primary issue is determining how to live from ER date (50) until 59.5.
No - you're dead wrong on that.  59.5 rule only applies to people who cannot plan and execute a multi-year strategy.  Search Roth Pipeline and Substantially Equal Periodic Payments.

The 457 plan is the king of retirement plans in my mind, but you don't have to have one to retire early.  Don't have to have a taxable account either, but many wind up with one due to exhausting all the limits on tax-advantaged plans.

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #9 on: September 10, 2014, 07:47:21 AM »
Thank you for the feedback. So the plan is to max out my 403b, 457b and then add to a Roth IRA. I believe I can add up to 17.5k to the 403b, 17.5 to the 457b and 5.5k to the Roth IRA (I am under 50 yo). I am also receiving a retirement plan from work.

My question: is there a maximum limit for my total retirement contributions?
Your 403B is limited to 52K for 2014, but to get to that, your employer would have to be putting a lot in - you can only defer 17.5K.  457 is a straight 17.5K limit - I don't believe employer contributions are allowed in these.  Then the IRAs are 5.5K (are you married?  If so, you have another 5.5K here, regardless of if spouse works or not).

There is no blanket maximum limit, however be aware that 401Ks, 403bs and the like have combined limits - so if you take another job and have already deferred 17.5K to 403B at job 1, you can't defer any more into job 2's 401K - I believe your employer could make contributions though - http://whitecoatinvestor.com/beating-the-51k-limit-friday-qa-series/.  The 457 is fantastic because it gives you another chuck of space in addition to those.  Traditional / Roth IRAs are yet another limit grouping.

Jellyfish

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #10 on: September 10, 2014, 07:59:46 AM »

No - you're dead wrong on that.  59.5 rule only applies to people who cannot plan and execute a multi-year strategy.  Search Roth Pipeline and Substantially Equal Periodic Payments.

The 457 plan is the king of retirement plans in my mind, but you don't have to have one to retire early.  Don't have to have a taxable account either, but many wind up with one due to exhausting all the limits on tax-advantaged plans.
[/quote]

Thanks!  Was not aware of these options, research commencing.

marouxlas

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #11 on: September 10, 2014, 08:45:55 AM »
Thank you for the feedback. So the plan is to max out my 403b, 457b and then add to a Roth IRA. I believe I can add up to 17.5k to the 403b, 17.5 to the 457b and 5.5k to the Roth IRA (I am under 50 yo). I am also receiving a retirement plan from work.

My question: is there a maximum limit for my total retirement contributions?
Your 403B is limited to 52K for 2014, but to get to that, your employer would have to be putting a lot in - you can only defer 17.5K.  457 is a straight 17.5K limit - I don't believe employer contributions are allowed in these.  Then the IRAs are 5.5K (are you married?  If so, you have another 5.5K here, regardless of if spouse works or not).

There is no blanket maximum limit, however be aware that 401Ks, 403bs and the like have combined limits - so if you take another job and have already deferred 17.5K to 403B at job 1, you can't defer any more into job 2's 401K - I believe your employer could make contributions though - http://whitecoatinvestor.com/beating-the-51k-limit-friday-qa-series/.  The 457 is fantastic because it gives you another chuck of space in addition to those.  Traditional / Roth IRAs are yet another limit grouping.

@dandarc: My employer is only contributing to my typical retirement plan, nothing for the 403b or 457b. I am just learning about retirement planning and I already have investments in taxable accounts. Can I use funds from there to slowly contribute more to my tax-deferred accounts (I am already doing that for the Roths). In other words, can I contribute to the retirement plans outside what the payroll office can withdraw out of my paycheck?
And since we are on the topic, can I move my retirement accounts from the default provider by my employer (TIAA) to an outside provider of my choice (Vanguard)? Thanks.

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #12 on: September 10, 2014, 09:00:21 AM »
Depends on the plan - you'll want to talk to your HR office about that.  You can't get around the contribution limits, even if they let you add money from outside sources - that 17.5K cap for 2014 would still be in play.  I'm assuming this is because the limits on percentages and whatnot your plans provide mean you might not be able to get to 17.5K by the end of this year, right?  Even if they don't let you add beyond payroll, you can just bump the deferral amount up to the max allowed ASAP, and missing on part of one year's worth of space is not the end of the world.

Same answer on the rollover question - some plans allow in-service rollovers to IRAs, some don't - talk to HR.  I would not do this with 457 money - that thing gives you tremendous flexibility down the road, unless the investment options are terrible, but maybe with 403B.  TIAA-CREF and Vanguard both have some pretty good funds - is there a particular reason you want to get away from them?

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #13 on: September 10, 2014, 09:14:59 AM »
One question you might want to ask is if your 403b allows you to self-match.  Honestly, I don't know the particulars of how this works, but the idea being that you elect to receive less salary but the difference goes into the 403b as profit-sharing contributions.  Somehow, this is allowed if the plan is structured in a certain way.  White Coat Investor has some articles about this.

marouxlas

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #14 on: September 10, 2014, 09:28:00 AM »
@dandarc: Thanks for the help. I am currently stuck with TIAA. Do you have any good products to suggest?

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #15 on: September 10, 2014, 09:34:28 AM »
@dandarc: Thanks for the help. I am currently stuck with TIAA. Do you have any good products to suggest?
Which funds do they have available in your plan?  Expense ratios?

There is a reason TIAA-CREF is huge in the educational / non-profit sector - they provide very good products - generally in the same ballpark as Vanguard.  Of course, in your particular retirement plan, the options may be a subset of everything they offer, so you want to look at the available list and go from there.

dandarc

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #16 on: September 10, 2014, 09:40:53 AM »
To elaborate - TIAA funds are not as good a deal, it appears, for retail investors compared to Vanguard.  One might say "much worse", but there are many funds with much higher ratios.

However, your employer, being a large, state university has likely negotiated a better deal on your behalf with them.  You may even have access to institutional class shares, which have costs very similar to Vanguards.

Nords

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #17 on: September 10, 2014, 05:45:11 PM »
For those of us who do not have access to 403b or 457b plans and who plan to retire before age 55, am I correct in assuming there is no way to circumvent the 59.5 age for IRA and 401(k) withdrawals without penalty? 
The vast majority of my retirement savings are in these types of plans so my primary issue is determining how to live from ER date (50) until 59.5.
Here's a 3000-word post on how you do that, with references to Michael Kitces' post and the tax code:
http://the-military-guide.com/2014/03/20/early-withdrawals-from-your-tsp-and-ira-after-the-military/
(The TSP is the military's version of a 401(k) with zero match.)

GGNoob

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #18 on: September 10, 2014, 06:08:18 PM »
Would you suggest I invest in pre- or after-tax for my 457? one school of thought is to balance pre and after tax planning since I cannot predict my tax bracket in retirement but considering the no penalty early withdraw of the 457 it is too tempting to contribute only pre-tax. Any thoughts?

The one thing here is that if you put money into your 457 pre-tax, you have to pay taxes later. So if you withdrew all of the money at once when you quit, you would pay a ton of taxes. So if its pre-tax, you'll want to leave it in your employers plan until you are 59.5 and only withdraw what you need each year. Then you can roll whatever is left into a Traditional IRA. If you do after-tax, then you could withdraw it all on day one and put it into a taxable account. But then you will be paying taxes on capital gains and dividends. The other option would be to roll it into a Traditional IRA from the start and do a Roth IRA Ladder to get your money tax and penalty free after 5 years.

My employer currently only offers pre-tax for my 457, but will be adding after-tax later this year. I think I will invest in the pre-tax only. Then I will either do the Traditional IRA to Roth IRA Ladder option or just leave it with the employer until I am 59.5. It will probably depend on how long I have to 59.5 once I retire and how much money I need to get me by until then.

foobar

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #19 on: September 11, 2014, 12:53:40 PM »

2. Would there be any circumstances that you would not recommend maxing out the 403 and 457 plans (using their tax benefits) and instead invest in a taxable account? Both plans have pretty good investment choices and low cost index funds.
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In general it is hard to beat the tax deferral. For example what is the tax rate of a couple taking 100k out of a iRA? ~11k.   If you are contributing in the 25% bracket that is a nice win and you need a really crappy plan to overcome that. Drop your income to like 50k and the deferral looks even better. Now it gets messier when you start looking at ACA, RMDs, SS taxes, pensions and so on. You can plug in your exact situation.

The one case where it might make sense is towards the end if you need liquidity (i.e. you have 100% of your assets in tax deferred). That is tough for a real early retiree (call it <35) but somewhat possible for a normal early retiree (52 or so. If you make to 55 you can use your 401(k)).

You can worry about future tax increases but I think that is pretty futile. Odds are no one is raising income taxes on the poor. The republicans don't want to alienate their voter base and the democrats are morally opposed to it. The upper middle class (i.e. people making 100k per year) on the other hand might have somethings to worry about.  The bigger risk in my mind is some major reform (i.e. VAT, elimination of the 0% capital gains bracket, ACA test for wealth) but predicting 20+ years of tax polices is crazy.

decisionprof

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #20 on: September 18, 2014, 10:17:34 AM »
Hi - I am also in a similar situation but would love others' opinions.  I just left work at a private college and have a decent sum in TIAA-CREF.  My new state university offers many options - including 457b (deferred comp).  I am allowed to roll funds because I left employment at the private college (with no penalites/no fees).  I am thinking of rolling all my TIAA-CREF (or at least a big portion) to the 457b (there are Vanguard options).  I am considering doing this so that I can access the funds I would need for those "gap" years if I retire early and I wouldn't have the 10% penalty then (for taking funds before 59.5).  Thoughts?  Thanks! 

decisionprof

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #21 on: September 18, 2014, 10:39:33 AM »
I just found this in another thread....
"Note, that if you too are thinking of consolidating accounts like we are, the money that comes from your 401k will still be subject to the same stipulations as the 401k,  even if it is now sitting in a 457. For example, say you have $20k in your 401k that you roll into your 457, which already had $30k in it. If you want to take money out at age 50 for an early retirement or a year of traveling, you can withdraw the $30k without any penalty, but the $20k will have the standard early withdrawal penalty, even though it's technically in a 457 account."

Just confirmed with the folks from the 457... if you roll from 403b - that money still has that status and would be penalized if withdrawn early.  Thought it was too good to be true.  SOEPP is still an option from the 403 b to help bridge the gap I think... this is still all pretty confusing.

TomTX

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Re: Bridging the gap between desired retirement age and IRS 59.5 y.o. rule
« Reply #22 on: September 20, 2014, 05:21:18 AM »
Hi - I am also in a similar situation but would love others' opinions.  I just left work at a private college and have a decent sum in TIAA-CREF.  My new state university offers many options - including 457b (deferred comp).  I am allowed to roll funds because I left employment at the private college (with no penalites/no fees).  I am thinking of rolling all my TIAA-CREF (or at least a big portion) to the 457b (there are Vanguard options).  I am considering doing this so that I can access the funds I would need for those "gap" years if I retire early and I wouldn't have the 10% penalty then (for taking funds before 59.5).  Thoughts?  Thanks!

Double check the total fees on that 457(b) - my employer has one, with Vanguard (Institutional!) funds with internally low fees. However, they charge nearly 0.5% on top of that to administer the 457/401 plans.

I would consider rolling it into a Traditional IRA @ Vanguard instead, or if fees are low in your TIAA - leave it there.