Attention Public Sector Employees: More than likely YOU are eligible to contribute to a retirement savings plan that has the advantage to make early retirement easy! Listen up teachers, firefighters, TROOPERS and other public sector employees!
Some basics first…
Retirement savings in the forms of 401k, 457b, or 403b are pretty similar. These savings options are plans that are offered or sponsored by your employer to entice you to save more for retirement. Many employers will even match a certain amount or percentage of money to the amount that you contribute. These contributions are taken from payroll, hence why they are work/employer sponsored. In my plan there are two buckets of money within that are kept separate for tax purposes. The money I contribute is put into a 457b while my employer match is put into a 401a. In most employer sponsored retirement plans, they are required to keep your contributions and employer compensations separate.
There are two ways to contribute tax wise to your plan:
- Pretax (aka tax deferred) – contributions are withheld from your paycheck prior to any tax being taken from those monies.
- Pros = tax savings are allowed to grow within the plan and your annual tax burden is lower by showing less gross income.
- Cons = taxed upon withdrawal (could be a pro if you are able to control your tax rate in retirement!)
- Roth (aka post-tax) – contributions are taxed on the way into the plan at whatever your annual tax rate is.
- Pros = all growth/ earnings are tax free! The balance you see is yours, no taxes on withdrawal.
- Cons = unlike pretax, your tax savings on the front end is not able to grow. The withdrawal benefits for 457b come into play.
In a nutshell… Pretax = taxed on the way out. Roth = taxed on the way in. NerdWallet explains this in more detail.
ACCESSING YOUR MONEY:
I have heard family and friends cite two reasons why they do not contribute to a work sponsored retirement plan… “the stock market could crash” and “that money is tied up until 59 1/2, what if I need it now.” While one reason is unrealistic (stock market going to 0.00000, more on this later) the other is not. There are several limitations to when you can access your money. The main requirement needed to be met is reaching the age of 59 1/2 years old. That’s right, unless you meet a hardship criteria among other things your money is tied up until age 59 1/2. IF you were to withdraw your money prior to the age of 59 1/2 you will pay a 10% penalty to Uncle Sam along with any tax owed. DO NOT DO THIS! All that being said… the 457b is different!
WHY THE 457b IS AWESOME:
So why is the 457b so powerful for any investor and especially anyone who would like to become FI/RE? As much as I love learning about investing and becoming financially independent I did not know of the superpower the 457b has!
IF YOU SEPARATE EMPLOYMENT FROM THE EMPLOYER OFFERING THE 457b THERE IS NO AGE RESTRICTION OR 10% PENALTY!
While there are ways well above my head to access your money prior to 59 1/2 in a 401k or 403b, it is so much simpler for a 457b. Simply retire / terminate from your job and the monies held in your 457b are YOURS to access! There is one caveat, it must be pretax money. Before knowing this I was contributing to my 457b with Roth classification. I quickly changed my contributions back to pretax.
Think this is too good to be true or don’t believe me? Check out the IRS code if you want… or read the following excerpt from the website for the State I work for https://das.iowa.gov/RIC/SOI/distributions
“Once terminated from employment with the State
Your distribution options after you leave state employment are very flexible. Your 457 account has no age limitation on cash distributions at retirement, whereas your 401(a) employer match account may be subject to an IRS 10% penalty on withdrawals made prior to age 59 1/2. Don’t make the mistake of rolling your 457 account to an IRA or other eligible plan without considering the impact of the receiving plan restrictions and costs.”
IF you are planning to retire prior to age 59 1/2, the 457b is your best friend! By implementing Index Investing and the Asset Allocation I previously explained here you will be well equipped to retire on your own terms.
IS A 457b/401k/403b ACCESSIBLE TO YOU?
CONTRIBUTE! All things aside you must contribute to your work sponsored plan. At the very least contribute to receive the match (aka free money)! Your future self will thank you…