It was May 14, 2021, exactly 10 years and 1 day after I defended my dissertation at the University of Mississippi.
I was sitting at my computer drafting the most difficult email I ever had to send. Maybe it was the struggle of the 40+ research papers I published? Or the long road to tenure? Maybe it was simply because I was used to having a J-O-B and I was leaving the one I had with no replacement.
Funding Retirement With Passive Income
When you can pay your expenses from passive income streams, you no longer “have” to work.
Over the last four years, I have saved and invested like crazy, maxing out my 401k, 457b, Roth IRA, and adding more to other investment vehicles to accumulate a nest egg that will return enough dividends and capital gains for me to pay myself a salary.
I was frugal for a few years and now I can live off my nest egg for years to come based on the 4% rule widely cited in FIRE literature.
Once I accumulated enough to reach my FIRE number, it was time to resign and roll over my workplace retirement accounts. I had two accounts that I wanted to move from my former employer’s plan: a qualified 403b and a private 457b.
Rolling Over Workplace Plans
Here were the steps I took to gain control of my assets in my workplace retirement accounts so that I can begin withdrawing money to pay myself.
Get Coordinated with Your Employer
- After my last day of employment, I called my HR department and spoke with the benefits coordinator. I asked her to ensure they have notified my workplace retirement account provider that I am no longer an employee. For some reason, my employer didn’t automatically do this, so I had to call them and request it to be done. The human resources representative was able to make the update while I was on the phone.
Understand Your Options
- I called my workplace retirement account provider and told them that I planned to roll over my 403b and I needed to know my options for the 457b. As expected, I could roll over my 403b into my own pre-existing traditional IRA. There was an easy online process for the rollover. I was asked questions such as:
- Is this a result of a divorce?
- Are you disabled?
- What is the account information of the account you are rolling the funds into?
Consider Tax Optimization
- Here were the options for my private 457b which is a bit different for those who work for the government or public institutions (Always check with your workplace retirement provider, IRS rules, and your financial advisor).
The 457b allowed me to defer being paid some of my wages during my peak earning years, which reduced my taxable income. This type of investment account is funded with pre-tax contributions. Lastly, there is no 10% penalty for using the funds before retirement age and that is precisely why I decided to invest in it. I was planning to retire early.
There is a lot to understand about a 457b account, such as the fact that the money invested is the property of the employer. If your employer goes bankrupt, that money may be accessed as property to pay debtors. Get advice about this account before investing. Also, 457b distributions will be reported on a W-2 for the tax year that I take distributions. Essentially, I had four distribution options for the 457b:
1) Take a lump sum now or later and do with the money as I please. I can move it into a brokerage account, invest in other assets or use it for living expenses. If I put it into a brokerage at another firm, even after paying the income tax, I will pay capital gains tax when I sell shares to make withdrawals as it grows over the years.
2) Leave it with the current provider until I am ready to use it or take required minimum distributions. No income tax will be due until I take a distribution. If I leave it in the original account, it will continue to grow tax free. The downside to this is that I’m stuck with the investment options (and corresponding fees) available through my employer’s workplace retirement plan.
3) Convert it to an annuity with the current provider.
4) Roll over to another private 457b with a new employer.
The Bottom Line
Sometimes you can change your mind on your distribution date choice. My plan allows me to make a distribution date selection, and that date can be changed one time only.
No matter what, be sure to decide what to do with your workplace accounts once you leave your employer. Why? Fees can impact your time to financial freedom. I recommend using the Personal Capital Fee Analyzer to see how much investment fees are costing you — the answer may surprise you. I used the free Personal Capital Dashboard to track all my financial accounts in one place. I was able to use the free tools to create a budget, analyze my investments, and ultimately achieve financial freedom.
Why is financial freedom important? For me, it’s the opportunity to spend the hours of my life on purpose without worrying about money! I am free to lovingly spend time with my family. I am free to work my side hustles as much or as little as I please. I am free to volunteer and write about things that are important to me. I am free to spend each day focusing on my health, family, and happiness. Time is precious, as it is the one thing that you’ll never be able to get back.
Featured individual is a paid spokesperson and not a client of Personal Capital Advisors Corporation (“PCAC”) and does not make any endorsements or recommendations about securities offerings or investment strategy. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.