Chapters

00:00 Introduction to 403(b) Options for PERS Retirees

00:36 Estimating 403(b) Plan Participation and Balances in Mississippi

01:35 Exploring the Five Options for 403(b) Plans at Retirement

02:46 Option 1: Keeping Funds in the 403(b) Plan

05:01 Option 2: Taking Distributions from the 403(b) Plan

07:00 Option 3: Executing a Rollover

09:20 Option 4: Moving Funds into an Annuity

11:11 Option 5: Purchasing Service Credit from PERS

13:19 Case Study 1: Leaving Money in the 403(b) Plan

14:57 Case Study 2: Taking Distributions for Early Retirement Income Bridge

16:59 Case Study 3: Rolling Over Funds from 403(b) to Access More Investment Options

18:20 Case Study 4: Acquiring an Annuity for Fixed Income

20:02 Case Study 5: Purchase Service Credit

21:50 Action Items for PERS Retirees With 403(b)

22:27 Preview of Next Video and Calls to Action

23:44 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 breaking down the five major options a PERS retiree has with their 403(b) plan, the pros and cons of each option, the taxes and penalties associated with each option, and we'll end our discussion with five case studies to tie everything together. Let's get started.

The choice of what to do with a 403(b) account balance at retirement primarily impacts specific members of the Mississippi Public Employees Retirement System. Unlike a deferred compensation 457(b) plan, which is open to all Mississippi public employees, 403(b) plans are uniquely designed for employees of public schools, universities, and certain nonprofit public health care systems. 

Based on my experience at Jackson County School District and available public data, I estimate that approximately $12 million is contributed to 403(b) plans each year by employees of Mississippi Public Schools and Universities. Based on that, I'm estimating that the average PERS retiree has between $40,000 and $60,000 at retirement in their 403(b) account, and that somewhere between 1,000 and 1,500 retiring public education and university employees in Mississippi face the decision of what to do with their 403(b) account every single year. 

So what are your options at retirement with your 403(b) plan? I like to break the options down into five categories, many of which are similar to the deferred comp 457(b) plan options I discussed in the last video, video number 61. 

One, you can leave the money in the plan, keep your retirement funds exactly where they are with your current provider if your plan allows it. Two, tTake withdrawals, distributions, draw down cash from the account to supplement your PERS pension income. Three, roll over the balance, transfer your 403(b) balance entirely out of the plan and into an outside qualified account like an IRA. Four, annuitize the balance, convert all or a portion of your 403(b) balance into a guaranteed contractual income stream via an insurance contract often sold by the current 403(b) plan provider. And five, purchase service credit from PERS, transfer the funds directly to the PERS system to buy additional years of service, to boost your lifetime, defined benefit pension. Let's unpack the rules, pros and cons, and tax implications of each option. 

First, let's look closely at option one: keeping your 403(b) funds in the plan. Plan rules. You can leave money in a 403(b) plan indefinitely after retirement, assuming the plan allows it and you meet the minimum plan balance requirements, which is typically several thousand dollars. However, the 403(b) balance will be subject to IRS's required minimum distributions, or RMDs for short, once you reach age 73. Note that designated Roth 403(b) balances, however, are not subject to these RMDs. 

Pros and cons. Pros. The biggest advantage of leaving your money in the plan is if you separate from service in or after the calendar year you turn age 55, the IRS allows a special rule where you can access this 403(b) plan balance without incurring the IRS 10% early withdrawal penalty. Cons: your investment universe remains strictly confined to whatever vendor and fund list your specific school district or university chose.  Furthermore, you remain subject to administrative plan fees, and handling multiple accounts across an entire career can complicate your estate planning. 

Taxes and penalties. Federal taxation, pre-tax 403(b) accounts maintain 100% tax-deferred growth, and Roth 403(b) accounts maintain tax-free growth. If you withdraw pre-tax funds prior to age 59 and a half and don't qualify, for the age 55 separation rule, you will owe a 10% penalty plus ordinary federal income taxes. Roth distributions, including earnings from the 403(b), are tax and penalty free if the account has been opened for five years and you are over age 59 and a half.

Mississippi Taxation. Mississippi fully respects the federal tax-deferred and tax-free accumulation within the plan. No state level taxes or penalties apply for simply maintaining your ongoing balance in the plan. In addition, qualified retirement distributions from a 403(b) are exempt from Mississippi income tax. 

Next, let's explore option two: taking distributions from the plan to supplement your monthly retirement income. Plan Rules.  Distributions. You have the following three payment options at and in retirement when it comes to taking distributions from your 403(b) account. One, a lump sum cash out where you take out the entire balance at once. Two, systematic withdrawals where you set up monthly, quarterly, or annual distributions. And three, periodic withdrawals if your plan allows it, where you take money when you need it. 

Pros and cons. The pros: This provides incredible lifestyle flexibility. You can set up recurring monthly distributions to match your monthly cash flow needs, or you can make irregular pulls for major purchases like travel, home renovations, or vehicles. The cons: every dollar you withdraw from your 403(b) 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 account. 

Taxes and penalties. Federal taxation: Every standard distribution from your pre-tax 403(b) account is treated as ordinary taxable income and is taxed at your federal marginal income tax rate. Unlike a 457(b), a 403(b) is subject to the 10% early withdrawal penalty unless you meet a specific exception. Most notably, separating from service in or after the calendar year you turn age 55. 

Mississippi Taxation: Under current Mississippi State Tax Code, retirement income, pension, and annuities are not subject to Mississippi income tax if the recipient has met the retirement plan requirements. Early distributions prior to meeting retirement plan requirements are not considered retirement income and may be subject to tax. Certainly consult a tax professional for guidance on your individual situation. 

Option three is executing a rollover to shift your money entirely out of the current 403(b) plan. Plan rules. Plan-to-plan transfers: Upon severance from employment, a participant in a 403(b) plan can have their account balance transferred to another employer's 403(b) plan, provided the new plan accepts it. Rollovers: Upon severance from employment, a participant can roll over all or a portion of their 403(b) balance to another qualified retirement plan, including a traditional IRA, simple IRA, SEP IRA, 401K, 457(b, or Roth IRA.

Pros and cons. Pros: Rolling your balance into a traditional IRA expands your investment choices exponentially. You can choose individual equities, specialized index funds, real estate trusts, or hire an independent advisor to customize a private portfolio for you. It also gives you an opportunity to consolidate your investments into a single account. Cons: If you execute a rollover from a 403(b) into a standard traditional IRA, you instantly forfeit the 403(b) age 55 rule. The money rolled over adopts the legal identity of the IRA. If you are under age 59 and a half and need to pull cash from that new IRA, you will face a mandatory 10% IRS early withdrawal penalty, even if you retired after 55. 

Taxes and penalties.  Federal taxation: a direct custodian-to-custodian rollover from a pre-tax 403(b) to a traditional IRA or a Roth 403(b) to a Roth IRA is a 100% tax-free event. No federal income taxes are withheld. However, if you choose to roll a pre-tax 403(b) into a Roth IRA, this will trigger a Roth conversion, forcing you to pay ordinary federal income tax on the converted amount in the year of the conversion. 

Mississippi taxation: Direct rollovers incur no state income taxes or penalties. However, be aware that Mississippi State tax treatment of a pre-tax to Roth IRA conversion can be highly nuanced depending on your retirement eligibility status. Always verify your plan details with a qualified tax professional. 

Let's look at option four: moving your 403(b) funds into an annuity. Plan rules: Annuitization is the process of converting your accumulated 403(b) retirement balance into a series of guaranteed periodic income payments, often for life, provided by the current plan provider. The funding sources: You can use either pre-tax or designated Roth 403(b) balances for annuitization if your plan allows it. 

Pros and cons. Pros: This builds an absolute wall of financial security. By converting a volatile market asset into a fixed contract, you shift all market downside and longevity risk. onto the insurance company. This mimics the guaranteed feel of your PERS pension. Cons: You lose complete control of liquidity. Once you buy a standard single premium immediate annuity, that principle is gone. You cannot pull out a sudden $15,000 lump sum for an emergency. Furthermore, annuity commissions can be steep and fixed payments rarely keep pace with inflation. 

Taxes and penalties. Federal taxation: When funded directly from a pre-tax 403(b) account, the purchase itself is tax-free. However, as the monthly annuity checks start to roll in, every single dollar is taxed at the ordinary federal marginal income tax rates. If funded via a Roth 403(b) through a proper tax-free rollover to an annuity, the distributions are tax-free provided you meet standard qualified distribution guidelines. 

Mississippi taxation: As long as the annuity is classified as qualified retirement income and you have met your standard plan and retirement rules, the income generated is completely exempt from Mississippi State income tax. 

Finally, let's focus on a strategy unique to public sector workers., option five, utilizing your 403(b) balance to purchase optional service credit directly from PERS. Plan rules. Purchasing service credit: A participant may transfer amounts in his or her account under the 403(b) plan to a defined benefit governmental plan under Section 414(d), such as PERS, 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. 

Pros and cons. Pros: it permanently elevates your guaranteed inflation protected lifetime pension. Buying extra years of service can also potentially allow you to hit your retirement milestone years ahead of schedule, unlocking your COLA much faster. Cons: it is a completely irrevocable decision. Once you transfer your 403(b) funds to PERS to lock in service credits, you can never undo the transaction or get that liquid capital back.  You surrender total individual investment control. 

Taxes and penalties.  Federal taxation: a direct trustee to trustee transfer of pre-tax 403(b) dollars to PERS to purchase service credit is 100% tax and penalty free, regardless of your age. However, when you eventually receive your monthly PERS pension checks, that income will be subject to ordinary federal income taxes. Note, designated Roth 403(b)) balances generally cannot be transferred directly to PERS to buy service credit due to statutory plan restrictions on mixing after tax funds into the defined benefit pension trust. 

Mississippi Taxation: The initial transfer creates zero state tax or penalties. Once retired, the resulting elevated PERS pension payments are completely exempt from all Mississippi State income taxes.

To see how these rules come into play, let's look at real-world examples starting with case study number one. Profile: Sarah is a 56-year-old public high school teacher retiring with 28 years of service. She has a $120,000 balance in a traditional pre-tax 403(b) plan. She decides to leave the entire balance inside her school district's 403(b) plan to protect her immediate options. One year later, at age 57, Sarah needs to pull out $25,000 to replace a failed home HVAC system and repair her roof. 

What are the tax implications? Because Sarah separated from her employer in the calendar year she turned 55 or older and left the money in her 403(b) plan, she qualifies for the IRS workplace plan exemption. When she pulls the $25,000 from her 403(b) at age 57, she will not be subject to the IRS 10% early withdrawal penalty.  She will only owe ordinary federal income tax on that $25,000 based on her marginal income tax rate. Because she met her official retirement requirements, Mississippi considers this qualified retirement income, making the $25,000 distribution tax-free from a Mississippi standpoint. 

What are the Medicare and Social Security implications? Since Sarah is only 57, she is well below age 65 Medicare threshold meaning the $25,000 withdrawal creates zero Medicare Irma surcharge risk. For Social Security, because she hasn't reached the minimum age of 62 to claim benefits, the Social Security Earnings Test is irrelevant. 

Now let's examine case study number two, which models a strategic income bridge. Profile: David is a 60-year-old university administrator retiring from PERS. He has $200,000 inside a pre-tax 403(b) account.  David wants to bridge his income needs for two distinct goals. One, purchasing private health insurance until age 65, and two, delaying his Social Security benefits until his full retirement age of 67. He sets up systematic distributions to pull exactly $2,500 per month or $30,000 per year directly from his pre-tax 403(b) account. 

What are the tax implications? David is over age 59 and a half, meaning his $30,000 annual distribution is exempt from any IRS early withdrawal penalties. The $30,000 is added to his PRS pension and taxed at standard ordinary federal marginal rates. As a resident of Mississippi who met retirement criteria, his $30,000 annual distribution is fully exempt from Mississippi State income tax. 

What are the Medicare and Social Security implications?  The extra $30,000 does increase David's federal adjusted gross income or AGI. Because Medicare looks back two years at income, this distribution will affect his premium starting at age 63. However, if David's baseline PERS pension plus the $30,000 distribution keeps his AGI below the IRMA threshold, he will face no elevated Medicare premiums. Because 403(b) structured systematic distributions are legally classified as retirement pension income, not active wages or self-employment earnings. The $30,000 does not count toward the Social Security earnings test limit. If David were forced to claim Social Security early at age 62, these 403(b) distributions would not count towards that earnings limit.

Next up is case study number three, evaluating a full rollover for portfolio customization. Profile: Linda is a 62-year-old public health system nurse retiring from PERS. She has $150,000 built up within a Roth 403(b) plan. Linda wants to transition completely away from her employer's limited investment list. She executes a direct custodian-to-custodian rollover of the full $150,000 into a retail Roth IRA to buy individual ETFs. 

What are the tax implications? Because Linda utilized a direct custodian-to-custodian transfer, the transaction itself is 100% tax and penalty free at both the federal and state levels. No current income tax liabilities are generated. Furthermore, this $150,000 now sitting in the Roth IRA will not be subject to IRS RMD rules at age 73.  And all future distributions will be tax-free at both the federal and state level. 

What are the Medicare and Social Security implications? Since a direct rollover of existing retirement assets bypasses the adjusted gross income line on a federal tax return, this financial move generates zero IRMA surcharge friction and has no bearing whatsoever on the Social Security Earnings test.

Let's look at case study number four where a retiree values absolute certainty over market liquidity. Profile: Robert is a 65-year-old public school teacher retiring with a modest PERS pension. He has accumulated a $100,000 balance inside a traditional pre-tax 403(b) account. Robert is highly risk averse and fears a stock market crash. He annuitizes his entire $100,000 account pre-tax 403(b) balance into a single premium immediate annuity that guarantees him a fixed payment of $600 per month for the rest of his life. 

What are the tax implications? The direct transfer from his pre-tax 403(b) plan to fund the qualified annuity contract triggers no immediate taxes or penalties. However, as Robert receives his $600 monthly checks or $7,200 annually, every dollar of that income Is fully subject to ordinary federal income taxes. Because his withdrawal started after age 59 and a half, the $600 monthly check is not subject to early withdrawal penalties. In Mississippi, retirement annuities are exempt from state income taxes, so the $7,200 annual income is 100% exempt from Mississippi state income taxes.

What are the Medicare and Social Security implications? The extra $7,200 annually increases his AGI slightly, but because the amount is modest, it is unlikely to push him over the entry-level Medicare IRMA premium thresholds. Annuity payments are passive investment retirement income. They do not represent active earned wages, meaning this income is completely exempt from the Social Security earnings test.

Our final example, case study number five, looks at optimization through the state pension itself. Profile: James is a 54-year-old university researcher and has 24 years of active PERS service and is one year short of service retirement before age 60. He has an $85,000 balance inside a pre-tax 403(b) account. James has exactly one year of documented but unpurchased out-of-state public teaching service.  He decides to execute a direct trustee to trustee transfer of his full $85,000 pre-tax 403(b) account over to Mississippi PERS to purchase his 25th year of service credit, allowing him to retire immediately under tier two rules based on service despite only being 54. 

What are the tax implications? Because this is executed as a direct trustee-to-trustee transfer to a governmental defined benefit plan, it is 100% tax-free. No 10% early withdrawal penalties are applied, even though James is only 54. Moving forward, the elevated monthly pension checks he receives from PERS will be subject to normal federal ordinary income taxes, but the entire pension remains 100% exempt from Mississippi's state income tax. 

What are the Medicare and Social Security implications? The transfer itself has no impact on his current AGI, preventing any current year IRMA complications.  In the future, the increased PERS pension will increase his AGI when Medicare looks at his income beginning at age 63. Because James is retiring early at 54, he cannot claim Social Security yet, rendering the earning test irrelevant at this point. In addition, pension income is excluded from the active wage earnings test. 

If you have a 403(b) account balance at retirement, here are your action items for today. One, log into your account.  Go to your specific 403(b) participant portal and verify your exact current balance across both pre-tax and designated Roth accounts. Two, determine your income needs before 55. Calculate your exact net cash flow needs to bridge any income gaps until you reach the critical age of 55. Three, audit your service credit. Work closely with a PERS benefit analyst to identify any opportunities you may have to purchase service credit.

I hope this video helps PERS members confidently navigate their choices regarding their 403(b) plan as they approach retirement. In our next video, we will continue down this supplemental retirement path and answer a closely related question:  “What should a PERS retiree do with their 401A 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 are looking for a financial planner who specializes in helping PERS members plan for retirement, including deciding what to do with balances in a 403(b) plan, 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.