3037: Investment Workshop 42 - Double Fisting Your Retirement Accounts by Wanderer of Millennial Revolution

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[00:00:51] This is Optimal Finance Daily Investment Workshop 42, Double Fisting Your Retirement Accounts by Wanderer of Millennial-Revolution.com. So a few weeks ago, we were in Germany and I met up with a fellow blogger, Justin McCurry from RootofGood.com, who was also traveling through Europe with his lovely wife and family at the time.

[00:01:13] And in our booze-socked afternoon, the topic of taxes inevitably came up. Shut up. Don't judge. This is how conversations with fires usually go. Anywho, the thing about Justin is that he's a master lifehacker. I mean, all of us five people are lifehackers, but Justin takes it to a level that impresses even me.

[00:01:33] This is a guy who deliberately took on student debt because he was able to somehow get it at a rate of 0.75%, then turned around and invested it in treasuries and made money off of it. That's right. Justin actually made money off of student loans. So when he told me about how little he paid in taxes, I wasn't surprised.

[00:01:54] As early retirees, the tax laws in the U.S. and Canada are super accommodating. And oftentimes, you can get away with paying almost nothing in taxes even with a million-dollar investment portfolio. But what surprised me was the fact that even while he was working at his full-time job, he was still able to reduce his tax bill to almost nothing. In fact, when he was working, him and his wife were making a combined salary of $150,000, yet paid only $150 in taxes.

[00:02:24] And a cornerstone of his tax strategy was what I like to politely call double-fisting his retirement plans. Incidentally, do not do a Google image search of that term if you're listening to this at work. You've been warned. Recall that in America, the employer-sponsored retirement accounts vary depending on what type of job you're in. They all operate mostly the same in that you contribute pre-tax money into it.

[00:02:51] The employer matches a part of it, and then you deduct that contribution off your gross income, thereby reducing your tax bill. Then, in hopefully early retirement, you get that money back without paying taxes or early withdrawal penalties by using a five-year Roth IRA conversion ladder. The only thing that differs is the name of the account. Super, so the accounts all operate mostly the same.

[00:03:15] You put pre-tax money into it, pick the lowest fee index ETF it offers, and you're off to the races. Here's the surprising thing. It's possible to qualify for multiple accounts at the same time. For example, if you're both a state employee and working at a non-profit, you can open up both a 403B and a 457.

[00:03:38] And unbelievably, the IRS allows you to contribute the maximum $18,000 to both accounts, meaning you can reduce your taxable income by $36,000. This is a uniquely American thing, as no other country, to my knowledge, has a retirement system as complicated as in the USA. Nor does any other country have weirdo tax loopholes like this. Though it's perfectly legal, almost nobody does it. They don't do it because almost nobody realizes it's possible.

[00:04:08] In situations where this is allowed, HR departments never advertise this possibility. So it's up to the employee to know about it and go out of their way to ask to set it up. In every single situation where we've encountered this ability to double fist, the reader was surprised to learn about it. And once they do learn about it, they're annoyed that they weren't doing this sooner since in the USA, contribution limits for tax-deferred accounts don't carry over into future years.

[00:04:37] If you don't take advantage of it, that contribution room is gone forever. So what job types are eligible for retirement account double fisting? Well, this isn't meant to be an exhaustive list, but in our experience, healthcare workers. State-run hospitals tend to be non-profit entities. But the employees technically work for the state. So people in this situation can qualify for both a 403B and a 457. Lawyers.

[00:05:08] Obviously, if you work for a private law firm, you only get a 401K. But if you work for the government in the prosecutor's office or some kind of organization that provides legal aid on behalf of the government, you may qualify for a 403B and a 457 or TSP. Depending on what level of government provides the funding. Educators. Specifically, anyone who works for any university or college should look into this.

[00:05:35] State colleges tend to be structured as non-profits, yet the employees are paid by the state. So you could qualify for both a 403B and a 457. A recent reader case, Millennial Academic Scientist, was surprised to learn that she could do this. And that knowledge shaved a few years off her retirement plan. Government contractors. People in this group that we're aware of include city planners, civil engineers, defense contractors, and IT consultants.

[00:06:03] If you work for a company that's a contractor to either the state or the federal government, you may qualify for some combination of 403B, 457, and TSP. This was Justin's situation. And again, this is not meant to be an exhaustive list. The key seems to be some kind of arm's length relationship to the government. Meaning that if your employer is related to the government, but not the government itself, then you may be able to do this.

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[00:09:12] The tax benefits are just too good, and it really simplifies the process when you're making decisions on how to invest. And if you don't work in the sectors described in this article, check to see if you're eligible for a mega backdoor Roth strategy. This requires that your employer-sponsored 401k plan allows for after-tax contributions.

[00:09:34] It works best if your plan offers in-service withdrawals and really only makes sense if your income is high enough to where you're already maxing out the pre-tax limit on your 401k and fully funding your Roth IRA. While the pre-tax portion of your 401k has a limit of $19,500 for individuals, the total limit is actually $57,000. And you can get there with after-tax contributions if your employer allows it.

[00:10:01] Also, many people who want to retire early worry about putting too much into their retirement vehicles and needing to pay penalties to access their money before traditional retirement age. But remember, there are strategies to get around this, like a Roth conversion ladder or setting up SEP 72T distributions. Also remember that your Roth contributions can be accessed tax and penalty-free. It's your investment gains that would be subject to taxes and penalties.

[00:10:30] That should do it for another edition of Optimal Finance Daily. I'll be back tomorrow as usual. So I'll see you there on the Wednesday show where your optimal life awaits.