013 | The Unfair (FI) Advantage Of Teachers | 457b

The Unfair (FI) Advantage Of Teachers | 457b
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457bMillionaire Educator Shares the Secrets of the 457b

  • Our guest: Millionaire Educator shows us how to invest your money. He shows how teachers, firefighters, police officers and public employees can leverage the power of pretax savings to supercharge their retirement , and become millionaires. Take this information to learn how to invest your money and retires decades before your peers
  • Ed’s journey from a college basketball player to a Spanish teacher
  • Graduate school led to $45,000 total debt at age 33
  • Taught ESL in Saudia Arabia and paid off debt
  • Returned to the US from Saudia Arabia with a $110,000 net worth
  • Had to figure out the concept of FIRE before it even existed
  • Taught in public school in Georgia for the next 7 years
  • The two retirement plans available to public sector employees: 403(b) and 457
  • Teachers can fully fund both of these accounts ($18,000 to each in current year)
  • Putting away this money helps dramatically decrease your taxes
  • In 2007 his net worth was $400,000
  • 2009: Next phase of their retirement journey
  • 403(b) fees are significant, so it was to their benefit to move jobs to roll their 403(b) accounts to a lower fee (‘separation of service’ clause)
  • 457b is a special account as it doesn’t have the 10% penalty for pre-59.5 age withdrawals
  • Phase 3 of retirement plan: Starting in 2014 they worked for 2 years and saved $238,000
  • What they are living on: a) $90,000 from 457s b) 72-T withdrawals from IRAs
  • How to control your tax bracket for big savings (potentially down to $0)
  • Debt avoidance: debt is paid with after-tax dollars
  • Geo-arbitrage and living abroad or even just a lower cost state
  • 457b account is an emergency fund that is pre-tax dollars
  • How Brad and Ed are not “perfect” with their investing
  • Pay increases for teachers when attaining new degrees. Raises that last a lifetime
  • Earning extra money for coaching and extended day teaching to max out retirement accounts
  • How they saved over $100,000 in a year towards retirement accounts
  • Hot Seat Questions

Listen to Brad and Jonathan’s thoughts about this episode here.

Links from the show:

Books Mentioned in the Show:

Resources:

The Unfair (FI) Advantage Of Teachers | 457b

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18 thoughts on “013 | The Unfair (FI) Advantage Of Teachers | 457b”

  1. Great stuff here guys. Really appreciate all your hard work so far. I have a question about the “separation of service” mentioned in this podcast. My wife will be quiting her current teaching job in FL to stay at home and raise our first child. She has been contributing to her 403b, how would we best go about moving her account to a vanguard IRA?

  2. Bryan,
    You’ll just need to fill out the “roll over” paperwork with your wife current 403b provider after she leaves her job. They will ask for a “separation of service” date; the HR department should provide her with a separation of service notice that she can show. Be aware that there might be surrender charges involved if her 403b has them. There is probably also a fee involved to move her money. Gotta love the 403b minefield! Best of luck.

  3. I think it’s important to note that there exist NON governmental 457b’s, which can be provided by non governmental tax exempt organizations (such as hospitals and charities). This has a significant downside compared to governmental 457b’s:
    Assets are NOT held in trust for employees. They are employer assets until they’re paid out to the employee (eg money is withdrawn from the 457b). So if the employer goes under, creditors can take money from your 457b.

    https://www.irs.gov/retirement-plans/non-governmental-457b-deferred-compensation-plans

    There’s some more differences listed in the link below, but they’re not as important.
    https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans

    • They are also subject to lump sum distribution upon separation from service if your employer does not allow you to leave the funds with them! This can result in a huge tax liability! These plans also can’t be rolled into any other tax deferred accounts except for another non-governmental 457b. This isn’t ideal for an early retirement scenario…

  4. Thank you guys for an awesome interview. It’s tremendously useful for someone who is new to the idea of FI and does have access to 401, 403b, and 457. Really enjoyed listening to this episode and you guys were asking all the right questions–you guys are like the Terry Gross of FI. Ed is definitely super knowledgeable with regard to how to utilize 403b and 457 to the fullest extent. I liked how you guys jumped in and clarified the finer points such as how each bucket was funded–exactly the kind of questions I would want to know. Keep up the good work and I look forward to many more posts and interviews.

    Just to clarify further, when Ed talked about rolling over his 403b to his IRA, it seems that those rollover-ed amount, or any amount in the IRA account regardless of origin, can be accessed through the 72T setup. Is this correct?

    Also, when taking the “substantially equal periodic payments”, does the payment amount depend on the total balance in the IRA? This seems important because it might be the case that someone has a lot of money in the IRA and because of 72T s/he is forced to withdraw a large sum–more than needed–of it until reaching 59.5 (or 5 years after the starting date if one starts after 54.5 year old). If so, then would it make sense to have a separate IRA account just to accept the 403b rollover and then access those fund through 72T, which could potentially lower the required distribution? Would that justify having multiple IRA accounts, as Ed seems to have?

  5. My wife is a teacher and I looked into the 457b withdrawals. From what I have read, you can only withdraw money early, without penalty, if you leave your job or have a hardship emergency. Is Ed taking the money out each time he quits his job and moves on, or is he using the emergency waiver? What qualifies as an emergency seems pretty stringent, so I am not sure how to take advantage of the tax savings as he is doing. (ie. withdrawing from 457b for regular expenses while loading his other pre-tax accounts).
    Thanks

  6. EelFI,
    My wife and I each have one big IRA that we take 72t distributions from. We DO NOT add money to those IRAs because it would trigger IRS penalties for sure. In my account I have about about four years of cash since I’ll have to take distributions for 5 years. I also have the dividends and capital gains paid into my IRA’s cash account (Vanguard Prime). I occasionally move a little cash into the VTSAX account if I feel good with my cash position. My wife has about seven years of cash in her IRA because she’ll have to take 9 more distributions.

    If I wanted to I could establish new 72t IRA accounts, but I’m now more focused on working a Roth IRA conversion ladder. More 72t distributions would eat up my “free money” amounts. In hindsight, I should have foregone the 72t distributions and focused on converting all my traditional IRA money to Roth accounts via a conversion ladder. At any rate, we get $18,375 a year in distributions. It sure helps with living expenses.

    Tripp, I’m kinda famous for quitting my job to wrestle control of my money. When we quit, we always roll our 403b money to traditional IRAs at Vanguard. On one occasion, we each rolled $24k of 457 money to our IRAs due to some pesky fees to access our money. Plus, we already had about $90k in 457 reserves.

    Here is how we access our 457 money:
    1. We quit our jobs.
    2. We leave the 457 money where it is. (All of ours is at Valic)
    3. When we need money, we fill out the distribution forms and send them to the HR people at our previous jobs.
    4. A week or so later, we receive a check in the mail and simply deposit it to our checking account. There is ALWAYS a withholding of 20%, but with careful tax planning you should be able to control your tax rate. (That withholding freaked me out the first time!)

    Let me know if you have any more questions. Ed

  7. Thanks for the follow up Ed. Not sure my wife will be quitting anytime soon so I have thought more lately about starting a couple Roth IRAs. Currently we both have pretax retirement plans though our employers.

  8. Ed,

    I am a math teacher in Tennessee. I have access to a state Roth 401K through Vanguard’s 2060 retirement fund. It has an expense ratio of 0.15%/year. I am maxing it out ($18,000) this year along with a Roth IRA for my wife and I ($11,000 total). I do not have access to a 457 plan (to my knowledge). My county offers a 403(b), but it currently offers annuities only. Do you think I am missing out on tax efficiency opportunities as an educator? I have always looked at Roth accounts as better because I will not have to worry about taxes in retirement. I am 27 and my wife is 24. She works for the state and does have access to a 457–but it would be very difficult for her to “separate employment” and find a new job. Thanks.

  9. Great podcast (I’m a little behind), the 457 is probably my biggest regret. I had one at my old job, where I worked almost 9 years and never contributed. I didn’t realize you had access after separation.
    I just wanted to put this out there, that it isn’t just for police and teachers. I am a city planner, and every city in which I’ve worked has offered a 457. I’m currently a contractor, so I don’t have access to one, but all the other city employees do. Many people don’t realize, but one of the largest professions in municipal work is engineering. There are also many lawyers, IT people, accountants, and PR people. All have access to 457s. The employer match is often quiet high. Municipal work could be a good option for anyone in these professions to switch into as the get closer to FI, so that they can take advantage of the 457.

  10. Hello, I’m late to listen to this podcast, but I’d like to ask you all a question. My husband is a teacher and we have been taking advantage of both accounts. That seems great, except… I recently read the NY Times series on bad 457/403B plans (https://www.nytimes.com/2016/10/23/your-money/403-b-retirement-plans-fees-teachers.html) and I think we are unfortunately in one through AXA. I have tried figuring out the fees and found they are not easily discoverable. When I asked, the response I got from the CFP was that my husband’s retirement accounts are in annuities and cost more because we have an advisor helping us with them. When I pressed him on the expenses, he said that the ongoing annual expense on each account is roughly 2%!! Do you have tips on what we should do to either get out of this or pick a better plan?

  11. I was so lost during this episode…had to stop partway through – these strategies are way over my beginner head – wondering where I need to start/what I need to read… to help me understand the concepts presented

  12. Just came across this. Great podcast. Thank you everyone for producing this.

    For Texas state and local gov employees, Texas Saver (https://texasaver.empower-retirement.com/participant/#/login) offers low fee 457b plans. The plan charges around 20-30 basis points for admin fees a year depending on how much you have invested (https://docs.empower-retirement.com/EE/TexasWR/DOCS/Plan-Highlights.pdf#page=7). Not completely free but not bad compared to what other plans out there.

    You then have a variety of investment options including Vanguard Institutional Index Fund, Instl Plus Shares (VIIIX) which has an expense ratio of only 2 basis points and tracks the S&P 500 (https://docs.empower-retirement.com/EE/TexasWR/DOCS/Investment-Expense-Ratios-and-Fund-Reimbursements.pdf).

  13. I found this podcast miss-leading. At one point you said the 457 was your emergency account. But you can only withdraw without penalty if you quit (or get fired). For someone who plans to work for 20 years in the same place, the only bonus for most govt employees is you can fully fund the 403B and 457.

  14. Thank you so much for this interview. I felt like putting the 457 money away was such a waste of money and time. Thank you so much! I am so glad I started listening to this community. THANK YOU! This will help me set the new economic foundation for my family.

  15. Very informative, thank you. It has definitely started me thinking about how to look at how to optimize or even have a tax strategy. I do feel that there should be a big caveat on the 457. Listening to it I thought it could be a source of immediate cash for regular living expenses, basically an income lifehack. But as previous commenter mentioned, it can only be withdrawn for , assuming you are staying in your current job. Is there a way around it that we should be aware of?

    Here is current wording from CalHR:
    457(b) Unforeseeable Emergency
    In certain situation, employees can take an unforeseeable emergency withdrawal from their account. An unforeseeable emergency is defined as : 1) a severe financial hardship to the employee resulting from a sudden and unexpected illness or accident of the employee or a dependent; 2) a loss of the employee’s property because of a casualty; or 3) other similar extraordinary and unforeseen circumstances arising as a result of event beyond the employee’s control.

    An unforeseeable emergency is defined as a severe financial hardship to the employee resulting from:

    Payments necessary to prevent foreclosure or eviction from their primary residence;
    Payment of expenses for medical care described in Section 213(d) of the Internal Revenue Code incurred by the employee, their spouse, or their dependents;
    Payment for burial or funeral expenses for the employee’s deceased parent, spouse, or dependents as defined in Sections 152 of the Internal Revenue Code;
    Expenses for the repair of unforeseen damage to the employee’s principal residence that would qualify as a casualty deduction from their federal income taxes under Section165 of the Internal Revenue Code; or
    Involuntary loss of the employee’s or their spouse’s income.

    Employees are not eligible for an unforeseen emergency withdrawal if their unforeseeable emergency can be completely or partially relieved through one of the following:

    Reimbursement or payment by insurance or other sources;
    The reasonable liquidation of assets, provided the liquidation would not itself cause an immediate heavy financial need; or
    The suspension of their elective contributions under the 401(k) Plan and/or 457(b) Plan.

    Approval is not automatic. If approved, the employee may receive up to the full amount of their account balance and there are no tax penalties.

    Source: http://www.calhr.ca.gov/state-hr-professionals/Pages/benefits-administration-manual-savings-plus.aspx#BAM-Hardship

  16. Loved this episode and as a faculty member at a University I was excited to learn I had access to this plan until I read the following fine print on our benefits page: “To enroll in the 457(b) deferred compensation plan, you must be an eligible faculty or staff employee with eligible earnings of more than $214,000 in 2018 earnings for 2019 participation.”

    Since I am nowhere near the $214k earnings mark it looks like I will have to continue to refine my other strategies on the path towards FI.

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