Chapters

00:00 Introduction to 401(a) options for Mississippi PERS Retirees

00:48 Who and How Many PERS Retirees Have to Make This Decision?

02:12 Five Options at Retirement with 401(a) Accounts

03:28 Option 1: Leave Funds in the Previous Employer’s 401(a) Plan

05:33 Option 2: Take Withdrawals to Supplement Pension Income

07:36 Option 3: Rollover Funds from 401(a) to Another Account

09:38 Option 4: Convert 401(a) Funds into an Annuity

11:08 Option 5: Use 401(a) Funds to Purchase Service Credit

12:52 Case Study 1: Keeping Funds in a Legacy 401(a) Account to Let it Potentially Grow

15:11 Case Study 2: Taking Distributions from 401(a) Account for an Early Retirement

17:22 Case Study 3: Rollover Funds from 401(a) Account to Build Custom Portfolio

19:02 Case Study 4: Converting 401(a) Funds Into Annuity for Income Certainty

21:13 Case Study 5: Using 401(a) Account to Buy 5 Years of Service Credit to Expedite Retirement Eligiblity

23:33 Action Items for PERS Retirees with 401(a) Account Balances

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. 

If you are a Mississippi public employee who previously worked out of state, you might be sitting on a 401(a) account wondering how it fits into your retirement strategy. Today, we are breaking down the five major options a PERS retiree has with their out-of-state 401(a) plan, the pros and cons of each option, the taxes and penalties associated with each option, and we'll end our discussion with five comprehensive PERS retirement case studies to tie everything together you learned today. Let's get started.

The choice of what to do with a 401(a) plan balance primarily impacts a subset of the Mississippi public employee retirement system population. A 401(a) plan is a custom employer sponsored retirement plan often utilized by government entities and universities in certain states, such as Florida, Georgia, Colorado, Utah, Oklahoma, and even Mississippi. These plans frequently utilize the 401(a) plan as either the primary or supplemental defined contribution retirement plan for public servants of that state. 

Because PERS does not allow a member to participate in both PERS and Mississippi's 401(a) plan, also called Optional Retirement Plan or ORP for short, Mississippi PERS members who hold a 401(a) account are almost exclusively individuals bringing over a 401(a) plan from a previous out of state employer. Based on Oklahoma Public Retirement System 401(a) participant data and Mississippi PERS contribution data, I estimate that approximately two to three percent of Mississippi PERS retirees face the decision regarding what to do with an out-of-state 401(a) plan each year.  Based on Oklahoma 401(a) balance data for active participants, I estimate the average 401(a) balance per participant for PERS retirees sits somewhere between $30,000 and $75,000.

So what are your options at retirement with your 401(a) plan? I like to break the options down into five distinct categories, aligning closely with the options we discussed in videos number 61 and number 62 for the 457(b) and 403(b) plans respectively. One, you can leave the money in the plan and keep your retirement funds exactly where they are with your previous employer's plan sponsor if the plan rules permit it.  Two, you can take withdrawals or distributions and draw down cash to supplement your PERS pension income. Three, you can roll over the balance and transfer your 401(a) funds entirely out of the old plan and into an outside qualified account like an IRA or a new employer's plan. Four, you can convert it to an annuity and annuitize all or a portion of your 401(a) balance into a guaranteed lifetime income stream.  And five, you can purchase service credit and move the funds directly to the Mississippi PERS system via a trustee transfer to buy extra 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 401(a) funds in your previous employer's plan. Plan rules: You can generally leave your money in a 401(a) plan indefinitely after separating from service, provided your balance satisfies the plan sponsor's minimum requirements, which are typically around $5,000. Pre-tax 401(a) balances are subject to IRS required minimum distributions or RMDs once you reach age 73. If your previous employer offered a designated Roth 401(a) component, those Roth balances are exempt from lifetime RMD rules. 

Pros and cons. The pros: The primary benefit of leaving funds in place is the institutional investment pricing if the plan offers index mutual funds. Additionally, if you separated from service with that specific employer in or after the calendar year you turned age 55, the IRS allows you to take penalty-free distributions from that 401(a) plan.  Bypassing the standard 10% early withdrawal penalty. 

Cons: Your investment universe is restricted to whatever fund lineup your previous employer maintains. Furthermore, keeping a legacy 401(a) account fragments your financial picture, making estate planning and long-term portfolio rebalancing more complex. 

Taxes and penalties. At the federal level, pre-tax 401(a) accounts enjoy tax-deferred growth and Roth 401(a) accounts compound tax-free. If you pull pre-tax funds out prior to age 59 and a half without meeting the age 55 separation rule, you will face a 10% early withdrawal penalty alongside ordinary income taxes. Roth 401(a) earnings are tax and penalty free if the account has been opened for five years and you are over 59 and a half.

At the state level, Mississippi does not tax continuous internal growth within an out-of-state 401(a) plan. Once you meet the retirement criteria of your 401, qualified distributions paid to a Mississippi resident are fully exempt from Mississippi State income tax. 

Next, let's explore option two: taking withdrawals or distributions to supplement your PERS pension. Plan Rules: Your 401(a) plan documentation dictates your distribution frequency options.  Most robust plans offer a lump sum cash out, systematic recurring withdrawals, or periodic ad hoc withdrawals. However, unlike a 457B plan, a 401(a) plan is a qualified plan that does not allow unrestricted penalty-free access prior to retirement age thresholds. 

Pros and cons.  The pros: This option provides flexibility. You can match systematic payments to your monthly living expenses or execute ad hoc withdrawals for large capital expenditures like travel or home renovations as they occur.   

Cons withdrawing money halts the power of tax-deferred compounding growth. Furthermore, if you pull large lump sum amounts from a pre-tax 401(a) account, you risk spiking your taxable income, which can trigger higher federal marginal tax rates in the year of those withdrawals. 

Taxes and penalties. At the federal level, every dollar distributed from a pre-tax 401(a) is treated as ordinary taxable income. If taken before age 59 and a half, it triggers a 10% IRS early withdrawal penalty unless you separated from that employer in or after the year you turn 55. 

At the state level, under the current Mississippi Tax Code, qualified retirement income from recognized plans is exempt from state income tax. However, if you take a premature, non-qualified distribution that violates your plan's core retirement guidelines, those funds may be subject to state income taxes. The key is the retirement guidelines of the out-of-state 401(a) plan, not the guidelines of the PERS plan when withdrawing funds from the 401(a). 

Option three is executing a rollover to shift your money entirely out of the legacy 401(a).  Plan rules: Upon separation from employment, you are legally entitled to move your legacy 401(a) balance via a plan-to-plan transfer, such as if you are retiring from PERS to work for another university outside of Mississippi and wish to move your old 401(a) from another state into your new 401(a) in the new state. You can also move your 401(a) balance via a direct rollover.  Pre-tax funds can slide seamlessly into a traditional IRA or another workplace plan, while Roth 401(a) funds can be directed into a retail Roth IRA. 

Pros and cons. The pros: Rolling 401(a) funds into an IRA expands your investment options exponentially compared to an employer's limited fund menu. It allows you to build a highly tailored portfolio or work with an independent financial planner to centralize your retirement assets. 

The cons. If you roll a 401(a) balance into a standard traditional IRA, you immediately lose the workplace age 55 separation rule. The funds adopt the legal identity of the IRA, meaning any distribution taken prior to age 59 and a half will face a 10% IRS early withdrawal penalty. 

Taxes and penalties.  At the federal level, a direct custodian to custodian rollover, pre-tax to traditional IRA, or Roth to Roth IRA, is completely tax-free. However, if you choose to execute a taxable rollover by moving pre-tax 401(a) funds into a Roth IRA, this triggers a Roth conversion, requiring you to pay ordinary federal income taxes on the entire amount converted. 

At the state level, Mississippi tax codes treat direct, like to like rollovers as non-taxable events. For conversions, the state respects federal guidelines but requires careful timing relative to your retirement plan eligibility. 

Let's look at option four: converting your 401(a) funds into an annuity.  Plan rules: Some 401(a) plans provide an internal option to annuitize balances through their native record keeper. Alternatively, you can execute a direct rollover of your 401(a) balance out of the plan to buy a commercial single premium immediate annuity from an insurance company. 

Pros and cons. The pros. Annuitization provides absolute cash flow certainty.  It converts a fluctuating market balance in your 401(a) into a fixed contractually guaranteed paycheck, transferring all investment risk and longevity risk to the insurance company and matching the secure feel of your PERS pension. 

The cons, you surrender liquidity and control. Once you buy a standard immediate annuity, the principal is gone. You cannot pull out a lump sum for an emergency at a later date.  Additionally, standard fixed annuities rarely adjust for inflation, which can erode your purchasing power over time. 

Taxes and penalties. At the federal level, funding a qualified annuity via a direct rollover generates no immediate tax liability. However, as periodic payments from the annuity land in your bank account, pre-tax funded distributions are taxed entirely at ordinary federal marginal income tax rates.

At the state level, as long as the underlying annuity represents a qualified retirement plan and you have met your plan's retirement criteria, Mississippi completely exempts these incoming payments from state income taxes. 

Finally, let's look at option five: utilizing your 401(a) balance to purchase service credit. Plan rules. Under IRS section 401(a) and section 414(d) rules, you are permitted to execute a direct trustee-to-trustee transfer from a qualified retirement plan to a defined benefit governmental plan like PERS. This allows you to purchase eligible service credit, such as out-of-state public service, military time, or professional leaves, as we discussed back in video number 31. 

The pros and cons. Pros: This strategy increases your guaranteed inflation-protected lifetime pension payout. Buying extra years of service can also help you hit your retirement milestone years ahead of schedule, unlocking your 3% cost of living adjustment much sooner. 

Cons: This is a completely irrevocable decision. Once your 401(a) cash is absorbed by the PER system to secure service credits, you can never reverse the transaction or reclaim the funds. You surrender all individual investment control. 

Taxes and penalties. At the federal level, a direct trustee-to-trustee transfer of pre-tax 401(a) dollars to PERS to purchase service credit is a 100% tax-free event and completely exempt from early withdrawal penalties. Note that designated Roth 401(a) balances generally cannot be transferred directly to PERS due to structural limitations on mixing after-tax funds into the defined benefit pension trust. 

At the state level, the initial transfer triggers no state taxes or penalties. Once you are retired, the 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, where a PERS retiree decides to leave funds in a legacy 401(a) account. .

Case study assumptions. Sarah is a 54 year old single professional who has officially begun her retirement from PERS. However, she also holds a legacy, out of state, pre-tax 401(a) plan from earlier in her career with a balance of $15,000.  In retirement, she chooses to transition into a part-time role with a PERS covered agency under Return to Work Rules to supplement her $42,000 PERS pension. She elects to keep her old 401(a) investment portfolio exactly where it is. 

Looking at her health insurance situation, Sarah has strategically coordinated her part-time return to work hours at the PERS Agency specifically to qualify for employer-provided health coverage under the Mississippi State and School Employees Health Insurance Plan. Because she secures health coverage directly through her public employer, she avoids having to buy costlier insurance as a retiree from either the state plan or ACA marketplace. 

What are the tax implications? Leaving her funds inside her legacy 401(a) plan protects Sarah from income taxes. At the federal and state level, her 401(a) balance growth remains entirely tax-deferred.  While her new part-time wages are subject to ordinary federal and state income taxes, Sarah's Pearl's pension remains fully exempt from state income tax, assuming she met the plan retirement requirements. Because she is only 54 and did not separate from that specific out of state employer at age 55 or older. Any 401(a) withdrawal before age 59 and a half would trigger a 10% IRS early withdrawal penalty and possibly trigger state income taxes as well.

What are the federal benefit implications? Sarah has no interaction with ACA premium tax credits or marketplace income cliffs because she is on the state group health plan. At age 54, she is far too young for Medicare, IRMA, lookbacks, or Social Security earning caps. She just needs to ensure her part-time hours and earnings comply with statutory PERS return to work criteria. 

Let's examine case study number two: taking systematic distributions to support an early retirement.

Case study assumptions. David, a 61-year-old married manager, brought an $80,000 pre-tax 401(a) balance over from Florida. Prior to retirement, his household income sat at $140,000. In retirement, his household modified adjusted gross income currently sits at a baseline of $55,000. To build a supplemental bridge alongside his new PERS pension, David sets up automatic, systematic, distributions to pull exactly $500 a month or $6,000 a year out of his legacy 401(a) Florida plan.

David faces a common early retirement challenge, bridging the health care gap before Medicare kicks in at 65. He and his spouse utilize the private ACA health insurance marketplace. At his baseline retirement income of $55,000, they qualify for substantial federal premium tax credits to keep their monthly health insurance costs low. 

What are the tax implications of these annual $6,000 distributions? Because he is 61 he has safely bypassed the IRS age 59.5 barrier. That means his $6,000 annual distribution is entirely exempt from the IRS 10% early withdrawal penalty. At the federal level, the distributions will simply be taxed as ordinary income. Here in Mississippi, because he has officially met his plan retirement criteria, the entire $6,000 annual distribution is 100% exempt from state income tax. 

What are the federal benefit implications?  Here is where David needs to be careful: the ACA subsidy. While a $6,000 distribution seems minor, it does raise his household MAGI from $55,000 to $61,000. This increase directly reduces their monthly ACA premium tax credit, making their health insurance more expensive. On the bright side, his total income remains way below the Medicare Irma threshold, which comes into play when he turns 63.  And these $6,000 annual distributions will not impact the Social Security earnings test if he chooses to claim benefits early, since the distributions are considered passive retirement income. 

Next is case study number three, evaluating a full rollover for portfolio customization. 

Case study assumptions. Our third case study involves Linda, a 55-year-old widowed professional with a baseline income of $115,000 before retirement.  And $42,000 in retirement. Linda holds a $75,000 balance within a designated Roth 401(a) plan from a prior out-of-state employer. Wanting to break free from her old employer's restricted investment Wanting to break free from her old employer's restricted investment menu she authorizes a direct custodian-to-custodian rollover of the full balance straight into a retail Roth IRA. 

Linda navigates early retirement health care via the ACA marketplace. With a household income of $42,000 she sits in an optimized spot for federal premium tax credits. Because the ACA marketplace only evaluates income, the total value of her 401(a) retirement account does not count against her.

What are the tax implications? Because Linda set up a direct like to like custodian transfer from her Roth 401(a) to a Roth IRA, the entire transaction is 100% tax free and penalty free at both the federal and state levels. In addition, the rolledover funds will not be subject to RMDs in future years. 

What are the federal benefit implications? Because a direct custodian rollover is a non taxable event, the $75,000 rollover does not impact Linda's modified adjusted gross income.  Her optimized ACA marketplace health insurance subsidies remain completely intact. This rollover also generates zero potential IRMA premium surcharges and has no impact on her future Social Security benefits. 

Let's look at case study number four, where a risk-averse retiree values income certainty over potential growth. 

Case study assumptions: Robert is a 65-year-old married retiree whose household income prior to retirement was $220,000. He holds a legacy pre-tax 401(a) balance of $110,000. Robert is highly risk averse and fears a retirement market downturn, so he decides to roll his entire 401(a) balance into a commercial single premium immediate annuity to generate a contractually guaranteed lifetime check of $650 a month. 

Turning to healthcare, Robert is 65, which means he is transitioning into Medicare Part A and Part B coverage. Because he is age eligible for Medicare, he has no relationship with the ACA marketplace or its premium subsidies. Instead, Robert's healthcare insurance costs are driven entirely by Medicare's income-based surcharges. 

What are the tax implications? The $110,000 used from the 401(a) to purchase a qualified annuity triggers no immediate taxes or penalties from the IRS. However, as his $650 monthly check begins to roll in, or the $7,800 a year, every dollar of that pre-tax money is treated as ordinary income at the federal level. Fortunately, because he is a Mississippi resident, our state tax code fully exempts this qualified retirement annuity from state income taxes. 

What are the federal benefit implications? Robert has zero ACA subsidy concern since he is on Medicare.  However, that steady $7,800 annual addition to his joint adjusted gross income needs to be monitored alongside his baseline per's pension. Because Medicare uses an income-based premium framework, this extraordinary income requires careful planning to ensure his household doesn't accidentally trigger a higher Medicare IRMA premium surcharge. Even just going $1 over can trigger thousands more in annual Medicare premiums.  There is no impact on Social Security benefits as this annuity is passive income excluded from the earnings test.

Our final example, case study number five, looks at buying service credit. 

Case study assumptions. James is a 52 year old single university administrator with a high earning income of $500,000 before retirement and $160,000 in retirement. He currently has 20 years of active service under Mississippi PERS and holds a legacy pre tax 41A plan worth $190,000.  Looking to retire early from his high stress job, James executes a direct trustee to trustee transfer of his full $190,000 balance over to PERS to purchase five years of eligible out of state public service, hitting his 25 year milestone, enabling him to retire immediately. 

Because James is retiring early at age 52 and sees several specialists out of state not covered by the state retiree plan he will be using the private ACA health insurance marketplace to secure coverage. However, given his large $160,000 retirement income from PERS, James does not qualify for any ACA premium tax credits and will pay full retail price for his health insurance premiums.

What are the tax implications? Because this is executed as a direct trustee to trustee transfer to a governmental defined benefit plan, the transaction is 100% tax free. The IRS completely waives the 10% early withdrawal penalty even though James is only 52. Moving forward, the elevated lifetime monthly pension checks he receives from PERS will be subject to normal federal ordinary income taxes, but the entire pension remains completely exempt from Mississippi State income taxes, assuming he met the plan requirements.

What are the federal benefit implications? Since James already pays maximum retail rates for health insurance, this transfer has zero impact on his ACA subsidy standing. The service credit transfer itself has no impact on his current AGI or immediate IRMA considerations. However, down the road, his increased monthly pension will factor into his future Medicare premiums, as he more than likely will be subject to premium surcharges when James begins Medicare at 65.  Since pension income is passive income, it will not be subject to Social Security earnings limits if James chooses to draw Social Security and resume working before his normal retirement age. 

If you have a 401(a) plan balance from a prior employer, here are your action items for today. One, log into your account, go to your specific 401(a) participant portal and verify your exact current balance across both pre-tax and designated Roth accounts. Two, request the summary plan document or SPD. Contact your Legacy 41A plan record keeper and request the official plan rules detailing your specific distribution options, investment options, fees, and retirement age definitions. Three, audit your eligible service credit. Work with a Mississippi PERS benefit analyst to get an official cost estimate for any buybacks or out-of-state service years you are eligible to purchase.

I hope this video helps PERS members confidently navigate their choices regarding their legacy 401(a) plans 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 a 401k 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 401(a) 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 in Mississippi. Always consult a qualified professional for personal advice specific to your situation.

24:19 Conclusion and next steps