Investment Workshop 22: Double-Fisting Your Retirement Accounts

When we were in Germany a few years ago, we met up with fellow blogger Justin McCurry from RootOfGood.com who was also travelling through Europe with his lovely wife and family at the time.

And in our booze-socked afternoon, the topic of taxes inevitably came up.

Delicious delicious taxes.

Don’t judge. This is just how conversations with FI-ers usually go.

Anyhoo, the thing about Justin is he’s a master life-hacker. I mean, all of us FI people are life-hackers, but Justin takes it a level that impresses even me. 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 it. That’s right, Justin actually MADE money off student loans!

So when he told me how little he paid in taxes, I wasn’t surprised. As early retirees, the tax laws in the US and Canada are super accommodating, and often times 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 $150k, yet paid only $150 in taxes! He wrote about how exactly he did it here.

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 reading 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, the employer matches part of it, and you deduct that contribution off your gross income thereby reducing your tax bill. Then in (hopefully early) retirement, you get that money back out without paying taxes or early withdrawal penalties by using a 5-year Roth IRA conversion ladder.

The only thing that differs is the name of the account. They’re arranged like so.

Retirement AccountEmployer Type
401(k)For-profit Companies
403(b)Non-profit Companies
457State Employees
TSPFederal Employees

Super. So the accounts all operate (mostly) the same. 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 403(b) AND a 457. And unbelievably, the IRS allows you to contribute the maximum $18k to both accounts, meaning you can reduce your taxable income by $36k!

This is a uniquely American thing, as no other country (to my knowledge) has a retirement system as complicated as the USA, nor does any other country have weirdo tax loopholes like this.

It’s perfectly legal, but almost nobody does it. They don’t do it because almost nobody realizes it’s possible.

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 *snicker*, 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. 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:

Health Care 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 403(b) AND a 457.

Lawyers

Obviously if you work for a private law firm, you only get a 401(k), 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 403(b) 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. State colleges tend to be structured as non-profits, yet the employees are paid by the state, so you could qualify for both a 403(b) AND a 457. A recent reader case MillennialAcademicScientist 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, defence contractors, and IT consultants. If you work for a company that’s a contractor to either the state of the federal government, you may qualify for some combination of 401(k), 403(b), 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 arms-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.

So if you suspect you may qualify for multiple retirement accounts, ask your HR or Payroll department TODAY. And if you find out you do, chime in in the comments below so I can add your job type to this article.

OK that’s it. Peace out!

Onto the next section!

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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.


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