Chapters

00:00 Introduction and overview of Roth IRA options for PERS retirees

00:37 Roth IRA Participation and Balance Estimates for Mississippi

01:34 Two Major Roth IRA Options at Retirement

02:13 Option 1: Leave Money in the Roth IRA and Pass to Heirs

03:55 Take Distributions from the Roth IRA

05:47 Case Study 1 - Withdrawing Down Roth IRA Completely in Early Retirement

07:49 Case Study 2 - Withdrawing Some Money from Roth IRA and Passing the Rest to Heirs

09:38 Case Study 3 - Leaving Money in Roth IRA and Passing All to Heirs

11:07 Action Items for PERS Retirees with Roth IRAs

12:08 Preview of Next Video and Outro

13:10 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 Mississippi PERS retiree has with their or their spouse's Roth IRA account, the pros and cons of each option, and the critical tax and penalty rules you need to know. We will also walk through three real-world PERS case studies to tie everything together. Let's get started.

The choice of what to do with a Roth IRA account at retirement impacts a significant portion of the Mississippi public employees' retirement system population. Whether the Roth IRA is held directly in the PERS retiree's name or in the spouse's name, many PERS households will have a decision to make. 

According to the 2025 Popular Annual Financial Report from PERS, our system serves roughly 145,000 active members and close to 120,000 retirees. National data from the Federal Reserve Survey of Consumer Finances and the Investment Company Institute shows that approximately 28% of U.S. households own a Roth IRA with average balances ranging between $45,000 and $55,000 per person. That means over 40,000 active Mississippi public employees and 30,000 current retirees could hold a Roth IRA account in their household.

So, what exactly are your options at retirement with a Roth IRA? Unlike deferred comp 457(b) or tax-sheltered annuity 403(b) accounts, your choices with a Roth IRA are simplified because the federal taxes on your principal contributions have already been paid. 

Option one is to leave the money in the plan, allowing the assets to compound completely tax-free for as long as possible and eventually pass to your heirs.  Option two is to take withdrawals or distributions to supplement your fixed PERS pension and support your lifestyle needs in retirement.

Let's unpack the rules, pros and cons, and taxes and penalties for both options. 

Let's start by looking closely at option one, keeping your funds inside the Roth IRA and eventually passing them to your beneficiaries. Under current IRS rules, original Roth IRA owners are never forced to take required minimum distributions or RMDs during their lifetime. If the sole beneficiary is your spouse, the spouse is also not required to take RMDs after your death.

If you pass the account to a non-Spouse heir or your spouse is not the sole beneficiary, the Secure Act requires them to fully withdraw the funds within 10 years, but every single dollar distributed to them remains 100% tax free, assuming the five-year rule is met, which we will cover more later in the video. 

Looking at the trade-offs, leaving the money untouched maximizes tax-free growth and creates a powerful tax-free legacy for your children or heirs.  On the flip side, holding on to Roth IRA funds means you may have worked unnecessarily longer than you needed to, and non-spouse heirs inheriting your Roth IRA will be forced to liquidate the account within a 10-year window following your death. Lastly, Roth IRAs are very tax inefficient when it comes to charitable giving, so please think twice before naming a charitable organization as a beneficiary for your Roth IRA.

From a tax perspective, the IRS allows tax-free growth within the Roth IRA, and heirs receive qualified distributions completely federal income tax-free. Mississippi fully mirrors this treatment, assessing zero state income taxes or penalties on ongoing growth or qualified inherited distributions. 

Next, let's explore option two: actively taking distributions from your Roth IRA to supplement your pension cash flow.

The IRS applies strict ordering rules to Roth IRA distributions. Your original direct contributions always come out first, completely tax-free and penalty-free at any age. Converted and rolled over balances come out second and are always tax free, but a 10% penalty will apply to the converted amount if withdrawn within five years of the conversion and under age 59 and a half.

Investment earnings from your original contributions and conversions come out last, and they are only tax-free if the five-year rule is met and you are 59 and a half or older. 

To be qualified, a Roth IRA distribution must satisfy two hurdles. First, your Roth IRA must meet the five-year rule, meaning five calendar years have elapsed since your first contribution. And second, you must be age 59.5 or older, disabled, or diseased.  If you pull the earnings before meeting both rules, the earnings portion is non-qualified. 

Taking qualified distributions gives you total cash flow freedom without driving up your taxable income. However, drawing down the account permanently shrinks your tax-free compounding ability. And if you aren't careful with your planning, taking early non-qualified distributions of earnings will trigger federal income taxes and a 10% penalty on those earnings.

Qualified distributions of earnings are free from federal and Mississippi State income taxes. However, non-qualified withdrawals of earnings are taxes ordinary federal income and face a 10% early penalty, though original contributions can always be pulled penalty free. 

Let's walk through our first real-world scenario: a single PERS retiree executing an early retirement and drawing down her Roth IRA. 

Meet Samantha, a 48-year-old single PERS retiree with a pre-retirement income of $125,000. She retires with a baseline PERS pension of $60,000. She holds a $30,000 Roth IRA consisting of $21,000 in original contributions and $9,000 in earnings. Because her Roth IRA was opened only three years ago and she is under age 59 and a half, her earnings do not meet qualified distribution rules.

To bridge her cash flow, she decides to withdraw $10,000 per year over three years to completely drain the Roth IRA account. For health insurance, Samantha purchases an individual plan on the ACA marketplace. She plans to claim Social Security at her full retirement age of 67. 

Let's evaluate Samantha's tax and benefit impact. In years one and two, her $10,000 annual withdrawals come entirely from her original contributions under IRS ordering rules we just discussed. This means the distributions are tax-free and do not increase her modified adjusted gross income, which helps keep her Affordable Care Act subsidies intact. 

However, in year three, after exhausting her $21,000 in original contributions, the remaining $9,000 represents non-qualified earnings. Because she is under age 59 and a half and hasn't met the five-year rule, in year three, the IRS treats that $9,000 as ordinary federal income, plus applies a 10% penalty. Furthermore, that extra $9,000 increases her modified adjusted gross income, reducing her health insurance subsidies in the third year.  These Roth distributions will not have an immediate impact on Medicare or Social Security benefits.

Our second scenario examines a married couple balancing active lifestyle spending with legacy planning. 

David, age 62, and Karen, age 60, had a joint pre-retirement income of $250,000. David retires with a $90,000 annual PERS pension. He holds a $250,000 Roth IRA that has been open for over a decade. To fund annual travel and capital projects, David takes $15,000 per year in systematic Roth IRA withdrawals for several years during their go-go years, leaving the remaining balance to compound tax free and pass to their adult children. 

For health coverage, they utilize David's retiree state employee group health insurance plan. David plans to claim Social Security at age 65, while Karen will delay Social Security until age 70.

Because David is over 59 and a half and satisfied the five-year rule, his $15,000 annual distributions from his Roth IRA are 100% tax-free at both the federal and state levels. Looking at federal benefits, this distribution has no effect on Affordable Care Act health subsidies since David is utilizing the state retiree health insurance plan.

The most exciting part for David and Karen is because Roth IRA distributions generate no additional modified adjusted gross income, their income stays at a level well below the threshold for Medicare IRMA surcharges for couples. In addition, these Roth IRA distributions are passive retirement income and will not count towards a Social Security earnings limit if David decides to return to work part-time. And these Roth IRA distributions are not included in provisional income in computing Social Security taxation, when David starts claiming at 65. 

Our final example evaluates a high-income widowed retiree using a Roth IRA purely for wealth transfer purposes. Margaret is a 66-year-old widowed PERS retiree who, along with her husband, earned $500,000 prior to their retirement. Her fixed PERS pension and survivor benefits provide $200,000 per yearwhich easily covers her $120,000 annual spending even after taxes. She holds a $150,000 Roth IRA. 

Because she has no cash flow deficit, she chooses to leave the funds in her Roth IRA, allowing the entire $150,000 balance to grow tax-free for the rest of her life, leaving it as an inheritance for her daughter. She transitioned to Medicare Part B and Part D at age 65 and plans to switch from survivor to retirement social security benefits at age 70. 

When her daughter inherits the Roth IRA account, every dollar distributes federal and Mississippi State income tax-free. Under the Secure Act 10-year rule, her daughter, who may herself be in her peak earning years and herself nearing her own retirement, can let the inherited balance grow tax-free for an additional decade, providing multi-generational wealth 

building without adding to her daughter's current annual tax bill. In addition, Margaret will continue paying the same Medicare premium surcharges she did before and will have the same provisional income for Social Security purposes as she did before. 

If you or your spouse currently hold a Roth IRA account and are approaching retirement, here are your action items for today. One, verify your five-year clock starting date. Log in to your retail broker such as Fidelity, Vanguard, Schwab, etc and establish the exact tax year you made your first Roth IRA contribution or conversion to ensure your earnings qualify for tax-free distributions. Two, review account ownership and beneficiary information. Confirm whether the Roth IRA is in your name or your spouse's name, and ensure primary and contingent beneficiary designations reflect your current intentions. Three, map income and tax thresholds. Model your PERS pension alongside Social Security, and other retirement income generating assets against Medicare, IRMAA, and federal income tax deduction phase-out limits to determine how much of your Roth IRA contributions and or earnings should be withdrawn each year to provide the most tax-efficient distribution strategy. 

I hope this video helps PERS members confidently navigate their choices regarding their or their spouse's Roth IRA plan as they approach retirement. In our next video, we will answer the question, “What should a PERS retiree do with their taxable brokerage account?”  

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're looking for a financial planner who specializes in helping PERS members plan for retirement, including deciding what to do with balances in a Roth 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 advice specific to your situation.