Chapters

00:00 Introduction to IRA options for PERS retirees

00:45 Who Has to Make This Decision?

01:17 Four Most Common Traditional IRA Options at Retirement 

02:10 Option 1 - Leave Money in the Traditional IRA

03:26 Option 2 - Take Distributions from Traditional IRA

04:54 Option 3 - Rollover the IRA or do a Roth Conversion

06:06 Option 4 - Use IRA Balance to Buy Service Credit from PERS

07:45 Case Study 1 - Use IRA Distributions as Income Bridge to Social Security

09:34 Case Study 2 - Use Traditional IRA for Strategic Annual Roth Conversions

11:45 Case Study 3 - Use Traditional IRA to Buy PERS Service Credit

13:34 Action Items for PERS Retirees with Traditional IRAs

14:28 Preview of Next Video and Outro

15:32 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 major options a PERS retiree has with their or their spouse's traditional IRA, the pros and cons of each pathway, and the taxes and penalties you can expect to pay along the way. We will also share three real-world case studies modeling different household incomes, marital statuses, and ages to analyze hidden traps like Medicare surcharges, loss of ACA subsidies, and Social Security taxation.  Let's get started.

The choice of what to do with a traditional IRA impacts a large portion of the Mississippi Public Employees' Retirement System. Unlike a 457(b), 403(b), 401(a), or 401(k), which are tied to specific employers, anyone with earned income can open an IRA, though not everyone will qualify for tax deferral status.  In addition, many of you may have rolled over a prior qualified retirement account into a traditional IRA when you or your spouse left your previous employment. 

So, what exactly are your options at retirement with a traditional IRA? Building directly on our fundamental retirement plan analyses throughout this series, I break the most common IRA options at retirement into four distinct pathways. 

First, you can leave the money in the plan, maintain the status quo with your current retail custodian allowing the assets to remain in their current investments. Two, you can take withdrawals or distributions and draw down the funds periodically or systematically to supplement your fixed PERS pension income. Three, you can roll over the balance and transfer the IRA funds into another qualified account, such as an active employer's workplace plan, or execute a Roth IRA conversion. And fourth, you can purchase service credit and move pre-tax IRA funds directly to Mississippi PERS via a trustee to trustee transfer to buy additional years of service credit. 

Let's unpack the rules, pros, cons, and specific tax rules governing each of these choices. 

Let's look closely at option one, keeping your funds in your current traditional IRA. You are permitted to leave your money in a traditional IRA indefinitely after retiring from public service. There are no corporate minimum balance limits to worry about, but you must remember that these pre-tax balances are subject to mandatory IRS required minimum distributions or RMDs once you reach age 73. 

Evaluating the trade-offs, keeping the funds exactly where they are, gives you account stability and maintains seamless tax deferral. On the downside, IRAs do not qualify for the workplace age 55 separation rule, meaning early access before age 59 and a half can trigger penalties

and leaving the balance untouched can create an RMD tax time bomb at age 73. 

Looking at the tax environment, the IRS permits 100% tax-deferred growth on ongoing balances, but any future distribution is taxed as ordinary income and carries a 10% penalty if pulled out before age 59 and a half. For Mississippi residents, the state does not tax internal growth and all qualified retirement distributions from the IRA will be completely free from state income taxes. 

Next, let's explore option two, actively taking distributions from your traditional IRA to supplement your retirement lifestyle. Unlike rigid workplace plans, your retail IRA custodian gives you total freedom over your distributions. You can easily set up automated monthly systematic withdrawals to build a steady retirement lifetime income stream, or you can execute ad hoc periodic lump sum pulls on demand whenever major life expenses pop up. 

Looking closely at the pros and cons, pulling cash provides instant lifestyle flexibility and completely cuts through employer red tape. However, taking distributions permanently halts the power of tax-deferred compounding, and large, unmanaged pre-tax withdrawals will artificially inflate your income bracket, which can damage your eligibility for health insurance subsidies and tax credits, and also push you into a higher marginal federal tax rate.

For standard distributions, the IRS treats every dollar as ordinary federal income and tacks on a 10% penalty if taken before age 59 and a half, unless an exception applies, like equal payments, education, or medical expenses, and insurance premiums specifically laid out under IRS Section 72(t)(2). In contrast, Mississippi completely exempts these distributions from state income tax once you meet standard retirement definitions though early or non-qualified distributions could still be subject to state income taxes. 

Let's look at option three, executing a rollover or Roth IRA conversion. When moving your traditional IRA balance, you have two primary options. You can execute a reverse rollover to slide your pre-tax IRA funds backward into a new or active qualified employer's plan, like a 401(k) or 403(b) plan, or you can transfer pre-tax assets directly into a Roth IRA via strategic Roth conversion to permanently alter your long-term tax liabilities. 

Looking at the pros and cons, a Roth conversion permanently wipes out your future RMD obligations and a reverse rollover can simplify your financial life. On the negative side, a Roth conversion demands a substantial upfront federal tax payment on the converted amount and the transaction is entirely irrevocable under current tax code. 

Breaking down the tax treatment a direct like-to-like pre-tax rollover is completely tax-free at both federal and state levels. However, executing a Roth conversion triggers immediate federal ordinary income tax on the entire amount converted, though it escapes the 10% early withdrawal penalty. Consult a tax professional to determine if your Roth conversion is subject to state income taxes. 

Finally, let's evaluate option four: utilizing your traditional IRA assets to purchase service credit directly from PERS.  IRS regulations and state laws explicitly permit a direct trustee-to-trustee transfer from a traditional IRA to 414(d) governmental plan like PERS. This allows you to use your personal pre-tax retirement savings to buy back valid out-of-state public service or military time or to repay a previous refund to fully restore your service history. 

Crucial spousal rule note here. Under Mississippi PERS and IRS regulations, a traditional IRA

used for a direct trustee transfer to purchase service credit must belong to the PERS member. You cannot transfer funds from a spouse's separate traditional IRA to purchase service credit for the PERS member, except for limited surviving spouse scenarios. 

Reviewing the pros and cons of a service buyback, you are trading market volatility for a guaranteed lifetime pension increase, and reaching your service milestones earlier may allow you to retire earlier and trigger your 3% COLA years ahead of schedule.  However, the catch is that this transaction is 100% irrevocable. Those funds enter the pension trust and can never again be accessed even in an emergency.

 Looking at the numbers, moving pre-tax assets directly from your pre-tax IRA to PERS is fully tax-free and penalty-free at the federal and state levels, bypassing the 10% penalty as well. Down the road, your boosted monthly pension checks will be treated as ordinary income by the IRS but they remain completely exempt from Mississippi State income tax for the rest of your life. 

To see how these complex rules interact, let's walk through three real-world scenarios. In our first scenario, Patricia is a 61-year-old widowed PERS retiree with a previous pre-retirement income of $125,000. She maps out an annual retirement lifestyle amount of $70,000 to comfortably fund her household but wishes to defer claiming her Social Security survivor benefits until her full retirement age to maximize her permanent check. Her baseline PERS pension gives her $45,000. 

To execute this plan, she sets up automated systematic withdrawals of $25,000 a year from her $180,000 traditional IRA to bridge that spending gap. For health insurance, Patricia transitions to a private individual plan on the ACA exchange.

Let's evaluate the explicit ripple effects for Patricia. At the federal level, she completely avoids the early 10% penalty, but still owes ordinary federal income tax on her $70,000 income. Mississippi shields her lifestyle, leaving her state tax liability at zero. The downside to her withdrawals appears on the ACA Health Marketplace, where her $25,000 distribution from her IRA drops her tax credits and raises her monthly out of pocket healthcare premiums. 

Fortunately, Patricia is too young for Medicare lookbacks and her retirement income should place her well below Medicare surcharge income thresholds for a single person. Because IRA withdrawals are passive income, this strategy creates no adverse Social Security earnings limitations. And since Patricia is delaying Social Security while drawing down her traditional IRA, this strategy will minimize future taxes on her Social Security benefits. 

Let's look at case study number two, modeling a high-income married household, optimizing their tax brackets before RMDs hit. 

Robert and Evelyn are a married couple with a joint income of $250,000 prior to retirement. Robert retires at age 55 with an annual PERS pension of $110,000, while Evelyn continues working a private consulting role, making $40,000.  Their total annual retirement lifestyle amount is $150,000, which is perfectly matched by their combined baseline retirement income. 

Because they do not need additional cash for living costs, they decide to execute a strategic strategy of converting $50,000 a year from Evelyn's $450,000 traditional IRA into a Roth IRA to optimize their lower tax brackets before RMDs hit at age 73.  For health insurance, they utilize Robert's coverage under the Retiree State Employee Group Health Insurance Plan. 

Unpacking the results for Robert and Evelyn, their strategic Roth conversion pushes their federal taxable income to $200,000 a year, yet it completely sidesteps the 10% early withdrawal penalty by utilizing a direct transfer. Mississippi honors this arrangement by exempting the conversion completely if Evelyn qualifies as retired.  Otherwise, state income taxes may be owed. In addition, Evelyn's consulting wages will be subject to state income taxes. 

Because they stay on the retiree state employee health insurance plan, they face zero ACA subsidy traps. They are safe from IRMAA surcharges today given they are still in their 50s, but they must carefully phase out these Roth conversions or reduce their consulting wages before hitting age 63 to protect themselves from potential Medicare surcharges at age 65, given where their income levels are. The Roth conversions will have no impact on the Social Security earnings limits and will have no impact on Social Security taxation as long as the conversions are complete before they begin claiming Social Security benefits. 

Our final example highlights an early retirement optimization strategy using an IRA to secure guaranteed pension income.

Diana is a 48-year-old single college athletic coach who has enjoyed a highly lucrative coaching career, pulling in a household income of $500,000 before retirement. To exit active employment immediately at age 48, she establishes an annual retirement lifestyle amount of $140,000. She currently has 21 years of Mississippi PERS service, moving up the coaching ranks, but wants to accelerate her retirement in the new age of NIL.

She maps out her execution strategy by authorizing a direct trustee-to-trustee transfer of $75,000 from her personal pre-tax traditional IRA to buy four years of out-of-state service credit. This moves her to 25 years of service, triggering an early retirement and allows her to meet her target lifestyle. For health insurance, she utilizes an independent group health plan. 

Looking at the breakdown for Diana, she pulls off a highly efficient transaction here.  Despite being just 48 years old, her $75,000 trustee transfer moves completely tax-free and penalty-free at both the federal and state levels. Looking forward, her enhanced retirement income will be subject to ordinary federal income tax, but Mississippi completely shields her elevated pension from state income tax. She transitions into an independent business group plan to avoid ACA complications, and she remains far too young for any immediate Medicare or Social Security concerns.

Long term, her PERS pension and Social Security benefits may push her above Medicare IRMAA thresholds, triggering premium surcharges, and Diana's increased pension may increase the amount of Social Security benefits that are subject to federal income taxes in the future.

If you or your spouse currently hold a traditional IRA and are approaching retirement, here are your action items for today. One, verify ownership and balance types. Log into your retail, custodian account at Fidelity, Vanguard, Charles Schwab, et cetera, and confirm the exact balance and owner of the IRA. Two, obtain a PERS cost estimate. If you have military time, out-of-state service, or prior refund, speak with a PERS benefit analyst to request an official cost calculation for a service credit purchase. Three, map your future. Chart your household income from your retirement date up to age 73. Identify the optimal window and optimal amounts to execute traditional IRA distributions or Roth conversions, taking into account ACA subsidies, Medicare premium surcharges, Social Security benefits, and RMDs.

I hope this video helps PERS members confidently navigate their choices regarding their or their spouse's traditional IRA 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 Roth IRA?" 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.

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 traditional IRA, please visit our website at perspro.ms to learn more about how we help PERS members like you. 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.