Chapters

00:00 Introduction to Mississippi PERS Deferred Compensation 457(b) Decision at Retirement

01:28 Exploring Option A: Leaving Money in the 457(b) Plan

04:26 Exploring Option B: Take Distributions from 457(b) Plan

06:27 Exploring Option C: Transfer or Rollover Funds From 457(b) Plan

08:50 Exploring Option D: Purchasing Service Credit Using 457(b) Plan

10:27 Case Study #1: Leave Money in the Plan

12:00 Case Study #2: Take Distributions from the Plan

14:32 Case Study #3: Purchase Service Credit

15:50 Action Items for PERS Retirees

16:36 Preview of Next Video and Calls to Action

17:52 Legal Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former public school finance officer, current financial planner, and host of the PERS Pro YouTube channel. Today, we are covering four major options a PERS retiree has with their Mississippi Deferred Comp 457(b) plan balance. We will review the plan rules, federal and state tax rules, and conclude with three case studies. Let's get started.

The decision of what to do with the Mississippi Deferred Comp 457(b) plan impacts a lot of public employees in Mississippi. According to PERS, facts and figures for fiscal year 2025, there are 37,181 active, inactive, and retired participants enrolled in the deferred comp plan. The plan holds $2.5 billion in cumulative retirement assets. If you do the math, the average account balance comes out to approximately $67,000 per participant. And if you do the math, roughly 10% of all active, inactive, and retired PERS members maintain a balance inside a 457(b) plan. It's difficult to pinpoint exactly how many PERS retirees face the difficult decision of what to do with their deferred comp plan, but I would estimate somewhere around 1,000 new retirees find themselves in this situation every year.

The moment you officially retire from your PERS-covered employment, the rules governing your deferred compensation account change. According to the IRS and Mississippi Government Employees Deferred Compensation Plan rules, you have four primary options available for your deferred comp 457(b) plan balance at retirement. One, leave the money in the plan, keep your funds exactly where they are within the Mississippi Deferred Comp program. Two, take withdrawals and distributions, pull systematic or lump sum payments from the account to immediately boost your cash flow. Three, transfer or rollover money, transfer your balance out of the state plan and into another qualified retirement account. And four, purchase service credit. Transfer money under the plan to a state or local retirement system, including PERS, to purchase years of service credit or repay amounts previously cashed out. Let's dive into the rules, the pros and cons, and the difference in federal and state taxation for each of these four strategies.

First, let's look closely at option A, leaving money in your Mississippi Deferred Comp 457(b) account.  Plan rules. You can leave money in a 457(b) plan indefinitely after retirement, but the balance will be subject to IRS's required minimum distribution rules, or RMDs for short, once you reach age 73. This means a minimum amount of money will be required to begin being withdrawn from your 457(b) account by April 1st, following the calendar year you turn 73. This requirement to withdraw funds from your 457(b) plan will continue as long as the funds are left in the 457(b) plan and as long as you continue to live. 

The pros and cons. Pros: the biggest benefit of keeping funds in your account is you keep the primary superpower of a governmental 457(b) plan intact. The ability to access your money completely penalty-free at any age after retirement. Cons, the biggest downside to leaving your money in the plan is your investment universe is strictly confined to the pre-selected fund lineup provided by the Mississippi Deferred Comp program. You cannot buy individual stocks, specific ETFs, government treasuries, or alternative investments. 

Taxes and penalties. Federal taxation. Your funds continue to grow with one hundred percent federal tax deferral when left in the plan. No current tax liabilities are triggered as long as the money remains inside the plan. However, as mentioned before, you cannot defer taxes forever. You must eventually start taking required minimum distributions once you hit your federally mandated RMD age.  Mississippi Taxation. Mississippi fully mirrors the federal tax deferred status. There is absolutely no state tax or penalties levied against your account balance for simply leaving money inside the plan.

Next, let's look at option B, taking distributions from your Mississippi Deferred Comp 457(b) account. Plan rules, distributions. You have the following three payment options at and in retirement when it comes to distributions from your Mississippi Deferred Comp account balance. You can take a lump sum payment, a partial lump sum payment, or systematic withdrawals.

The pros and cons. Pros. This provides incredible lifestyle flexibility. You can set up recurring monthly distributions to match your cash flow needs or make irregular distributions for major purchases like travel, home renovations, or vehicles. Cons. Every dollar you withdraw stops compounding. If you pull too much capital out too aggressively in the early years of your retirement, you risk prematurely depleting this supplemental retirement asset.

Taxes and penalties. Federal taxation. Every standard distribution from your pre-tax 457(b) account is treated as ordinary taxable income and is taxed at your federal marginal income tax rate. However, there is an exception for eligible retired public safety officers to exclude up to $3,000 of their 457(b) distribution to pay for qualified health insurance premiums. For everyone, governmental 457(b) plans are completely exempt from the IRS 10% early withdrawal penalty for those deciding to take distributions in retirement prior to age 59 and a half. 

Mississippi taxation. Under current Mississippi tax codes, retirement income, pensions, and annuities are not subject to Mississippi income tax if the recipient has met the retirement plan requirements. Early distributions are not considered retirement income and may be subject to state income tax. Certainly consult a tax professional for guidance on your individual situation and determining whether distributions from a 457(b) plan before age 59 and a half would be subject to Mississippi State income taxes. 

Next, let's look at option C: transferring your money out to another qualified retirement plan.  Plan rules. Plan-to-plan transfers. Upon severance from employment, a participant can have all or a portion of the account balance transferred to another 457(b) plan. Rollovers. Upon severance from employment, a participant can have all or a portion of the account balance rolled over to another qualified retirement plan, including a traditional IRA, a simple IRA, a SEP IRA, a 401k, a 403B, or a Roth IRA.

The Pros and Cons. Pros. Rolling your balance into other plans like a traditional IRA can expand your investment choices. You can choose individual equities, specialized index funds, real estate trusts, or hire an independent advisor to customize a private portfolio for you. Cons. If you execute a rollover from a governmental 457(b) into a standard traditional IRA or another retirement plan type, you instantly forfeit your early withdrawal penalty exemption.  The money rolled over adopts a new legal identity of the plan in which you're rolling over into. If you're under age 59 and a half and need to pull cash from that new plan, you could suddenly be hit with a mandatory IRS early withdrawal penalty that you could have avoided by leaving the money in the deferred comp plan. 

Taxes and penalties, federal taxation. A direct transfer or custodian to custodian rollover from your pre-tax 457(b) into another eligible pre-tax qualified plan is a federal tax free transaction. No federal income taxes are withheld and no current income tax liability is generated. However, if the funds are rolled over into a Roth IRA, then the funds rolled over would be subject to federal income taxes at the marginal tax rate in the year of the rollover.

A 10% early distribution penalty still would not apply to the funds rolled over into the Roth IRA, but be aware that they could be subject to the 10% early distribution penalty if and when they are withdrawn from the Roth IRA. 

Mississippi Taxation. Mississippi aligns perfectly with federal tax code. A properly completed direct transfer or rollover at or in retirement generates no state income tax liability. Always consult a tax professional for advice specific to your situation, however.

Finally, let's look at option D: purchasing service credit under a state or local retirement system. Plan rules. Purchasing service credit. A participant may transfer amounts in his or 457(b) account under the plan to the fiduciary of a state or local retirement system in order to enable the participant to purchase years of service credit under the system or repay amounts previously cashed out under the system. Please go back and watch video number 31 for the eight different ways a PERS member can accumulate and purchase service credit, including for out-of-state service, professional leaves of absence, and military service. 

The pros and cons. Pros. If you are light on cash but have the opportunity to purchase service credit, then using funds in your deferred compensation account can help solve that problem. It's also a great way to transfer longevity and inflation risk from yourself to the state plan. Cons, this is an irrevocable decision and your funds will be locked up once you transfer the funds to the pension system to purchase the service credit. 

Taxes and penalties.  Federal taxation, purchasing service credit is a tax-free transaction with no early withdrawal penalties if purchasing the service credit before age 59 and a half. However, in retirement, your pension payments you receive will be subject to ordinary federal income taxes. Mississippi Taxation. In addition to no state income taxes being generated with this service credit transaction, under current Mississippi State Tax Law, pension payments are not subject to Mississippi income tax if the recipient has met the retirement plan requirements.

To see how these strategies apply, let's look at three specific real-world examples. First, let's look at case study number one, a PERS retiree who decides to step away from public service early at age 48. They've accumulated a $100,000 balance in their pre-tax Mississippi Deferred Comp plan. Instead of taking a standard corporate job, they are launching their own independent business. Because they aren't sure how successful or volatile the new business will be in its first few years, they choose to leave their entire $100,000 balance parked inside the deferred Comp 457(b) plan. 

Federal and state tax implications. By leaving the money in the plan, the full $100,000 continues to compound tax-free. Let's say that at age 52, their business hits a severe temporary cash flow crunch, and now they need to pull out $20,000 to keep the business afloat.  Because the money remained inside the 457(b) structure, they will owe ordinary federal income tax on that $20,000 based on their current marginal federal tax rate, but they will not face the 10% early distribution penalty even though they are under age 59 and a half. If they live in Mississippi, that $20,000 distribution is completely exempt from state income taxes as well. 

IRMAA and Social Security concerns. No IRMAA penalties or social security earnings limit concerns when the twenty thousand dollars is withdrawn at age fifty two.

Next, let's look at case study number two. This is our income bridge scenario. Imagine a PERS member who officially retires from their state position at age 62 with a $150,000 deferred comp balance. As we've discussed in previous videos, like video number 50, “Health insurance options at retirement?”, and video number 54, “When should a PERS member claim social security?”, they face a very common scenario. 

One, they need money to buy private health insurance to bridge the gap the next three years until they hit age 65 and qualify for Medicare. And two, they want to delay claiming Social Security five more years until their full retirement age of 67 to increase their lifetime monthly benefit check. To solve this cash crunch, they set up a systematic distribution to pull exactly $2,000 per month or $24,000 per year straight from their 457(b) account to cover cash flow gaps. 

Federal and state tax implications.  The $24,000 annual distribution from 457(b) is added directly to their taxable federal return alongside their PERS pension. It is taxed at ordinary federal marginal tax rates, but it is exempt from the 10% early withdrawal penalty.  Because this retiree is a Mississippi resident and they properly executed the $24,000 retirement distribution, 100% of this distribution is exempt from Mississippi State income taxes. 

IRMAA concerns. The extra $24,000 does increase their federal adjusted gross income and would come into play in determining Medicare surcharges once they reach age 63.  However, because the entry-level Medicare IRMAA threshold for a single filer sits comfortably above $100,000, their combined PERS pension and $24,000 deferred comp stream are highly unlikely to cross that threshold and trigger elevated Medicare premiums.

Social Security Earnings Test. The Social Security Earnings Test only measures earned income from active wages or net self-employment. Because 457(b) distributions are categorized strictly as retirement distributions, this $24,000 in income does not count toward the earnings test limit. If circumstances changed for our retiree that forced them to claim Social Security early at age 62, these distributions from their 457(b) before their normal retirement age would not reduce their social security benefits.

Finally, let's evaluate case study number three, the out-of-state plan-to-plan transfer. Let's assume a PERS member decides to retire from Mississippi State Service at age 55 with an $80,000 balance in their deferred comp account. Instead of retiring fully, they accept a new public position in another state that operates its own governmental 457(b) plan. To keep their finances simple, this retiree authorizes a direct transfer of their full $80,000 balance into the new state employer's 457(b) account.

Federal and state tax implications. Because this transaction is executed as a direct custodian to custodian transfer between two governmental 457(b) plans, it is a 100% tax-free move. No federal taxes are withheld and no current Mississippi state taxes are triggered. More importantly, because the destination account is also a governmental 457(b) plan they fully preserve their right to pull penalty-free withdrawals before age 59 and a half. 

IRMAA and Social Security concerns. Because a direct rollover does not hit their tax return or affect their adjusted gross income, it creates zero current year IRMAA friction. Furthermore, it has no impact on their Social Security earnings record or future benefits calculation.

If you are beginning to decide what to do with your Mississippi Deferred Comp 457(b) account at retirement, here are your action items for today. One, log into your account, go to the Mississippi Deferred Comp Online Empower Participant Portal and verify your exact current balance across all your investments. Two, map your liquidity timeline. Carefully determine if you will need supplemental cash before you reach age 59 and a half. If you will, consider leaving enough inside the 457(b) account to keep your penalty-free access alive. Three, audit your service credit. Work closely with a PERS benefit analyst to identify any opportunities you may have to purchase service credit and what that would cost you.

I hope this video helps PERS members confidently navigate their options regarding their deferred compensation account as they approach retirement. In our next video, we will continue down this supplemental retirement track and answer a closely related question - “What should a PERS retiree do with their 403B plan?” Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members.

If you have a follow-up question about PERS or anything else related to personal finance, please visit our website at perspro.ms click YouTube, and submit your question or topic for a future episode. And finally, if you're looking for a financial planner who specializes in helping PERS members plan for retirement, including deciding what to do with balances in a deferred comp 457(b) account, please visit our website at perspro.ms to learn more about our firm and to schedule your initial consultation.

Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Disclaimer, this video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.