I never thought I would be the type of gal who stays up late reading about taxes, 401k’s and Summary Plan Descriptions (SDC), yet here I am and I blame my friend Fritz…
After-Tax 401k Contributions
Last week, during an early morning van ride to the airport in Tucson, I popped in my earbuds to listen to Fritz wax poetic about his retirement plans on the Choose FI podcast. During his interview, Fritz mentioned a not so commonly known way to pad your retirement with After-Tax 401k contributions. You can read all about the method and its pros and cons HERE, but the main issue is whether or not your company allows it. My employer, I have come to find, sadly does not. Roadblock #1.
Ok, honestly, I am not all that upset about it. I mean, I don’t like knowing I can’t do something (I have never been great with authority), but until a week ago I never even considered doing an after-tax contribution so it’s easy for me to let this one fly. The next roadblock, however, I am not taking so lightly…
While I had my retirement provider on the line, I figured it was as good a time as any to confirm another huge (for me) early retirement factor, In-Service Rollovers. An in-service rollover means taking money from your 401k and rolling it to an IRA while you still maintain employment at your company. Why would anyone want to do this? Easy – more diversity, better investment options, and increased control over the future of those funds. What kind of control you ask?? For me, early retirement control via the Roth IRA conversion ladder. Let’s dissect this a bit…
Have you heard of the Roth IRA conversion ladder? If not, here is an overly simplified explanation:
- Contribute max to traditional 401k (18k pretax as of 2017)
- Quit job, roll 401k to a Traditional IRA
- Roll a portion of your Traditional IRA into Roth IRA (yes, taking a tax hit on the conversion but skipping the 10% early withdrawal penalty)
- Let it season for 5 years
- Withdraw the rolled portion from the Roth IRA free and clear of taxes and penalties
Further reading can be found by these dudes who can explain it far better than I…
So back to the phone conversation with my retirement provider. Turns out…
MY COMPANY DOES NOT ALLOW IN-SERVICE ROLLOVERS.
I know what you’re thinking. So what? Who cares?? Do what all the cool kids are doing. Build up a savings of 5 years of expenses, quit your job (hello #2??), and start your Roth conversion ladder. But that’s the problem. I haven’t written much about my retirement plans because I wasn’t planning a traditional mic drop on my last day of work…in fact, I don’t plan on quitting my job at all once I am FI. Or ever. Well, not necessarily never ever but not in the foreseeable future. Why?? Two words – NO MINIMUMS. Here is why that matters:
Like most jobs, the airline industry expects you to show up and work. They pay you to be there, they give you fancy benefits, and you take home a paycheck in return. Simple, right? In order to enforce this equation, most airlines make flight attendants work a minimum amount of hours each month. For example, my aunt flew for AA and their minimum was around 80 tfp (“hours” for you common folk 🙂 ). My stepmom flew for the now-defunct NWA (the airline not the hip-hop group) and their minimum was similar. My airline?? 0. In theory, I can choose to stay home & not get paid but still collect my 4 weeks vacation pay (in 2 years it will be 5!), have access to insurance, full flight benefits, and still be considered a full-time employee. Rotten, right??
Now don’t be getting your undies in a wad, there are a few caveats. First. I still have to bid for my line (schedule) and I am responsible for passing my trips off to someone else. Sometimes I can do it easily, other times you have to bribe someone with an incentive like $100 per trip. The second caveat is that I stay current on evacuation and medical emergency training each year by attending a day of recurrent training. Did I mention training is paid? It is. And, for the sake of balance, I also have to keep my union dues current as well as pay for my insurance so it doesn’t lapse (currently $9/month but next year it will jump a whopping $4!)… Ok, ok – no gripes here. But you can see why keeping my job is beneficial. Of course, this arrangement could change at any time during any of our contract negotiations but in the meantime, “no minimums” are the two words that are allowing me the potential to have my overly frosted cake and eat it too.
Once I reached financial independence (FI), my plan was always to keep my job but to cut my hours…to nothing. 😉 Actually, that’s not true. My plan was to work minimal trips just for fun but never enough so that it would feel like “work”. One leg to Cancun, overnight, one leg back? Sure! Perhaps a quick trip to Charlotte to visit my friends The Groovy’s? Or a hop up to Minneapolis to crash a North Stars meet up whilst still getting paid?! The possibilities were endless… If I stopped flying for work (hard multi-leg/multi-day trips that pay well) and started flying for fun (short little hops with long overnights that pay crappy), I could lower my income (and thus my tax bracket) and be free to begin my Roth conversion ladder at the lower taxed rate. But with no options for in-service rollovers, that can no longer happen.
How big of a deal is this?? PRETTY FUCKING BIG.
As I see it, I currently have 2 options:
- Stay and lose early access to funds, therefore keeping me at work indefinitely
2. Quit, gain access to the money, and lose access to all those glorious benefits (most importantly my kick-ass healthcare at $13/month), causing my expenses to go up drastically.
There are far too many things I would be giving up just to access the money, especially since the work part isn’t necessary…
So I won’t.
I now have to figure out a different map for my financial future. FI will be mine, but I won’t really have access to the money which, in turn, still makes me dependent. I have decided to keep pushing forward and see what new ideas come to me (if you have any be sure to share them in the comments!). I am still maxing my taxable accounts and throwing the rest in my brokerage account (maybe that’s the plus to not being able to do after-tax contributions?). I am continuing to keep my overall lifestyle costs down (despite upcoming trips that I am so excited for!!) and have added additional income with my rental place now rented out. Heck, I am even tinkering with the idea of buying a unique seasonal property that would keep me grounded for half of the year and free as a bird the other half ensuring a super low COL… So many ideas already!!
EDIT: Another little nugget I learned is that once I stop working more, the most I can contribute to my 401k is 50% of each paycheck. Perhaps this is known to others but it was not known to me! That means, in the future, if I want to contribute the full 18k (or whatever it is in the following years) I have to make double that amount – currently 36k in income. Thankfully, half would be tax deductible and push me to the lower tax bracket. At that rate, it may make more sense to do a Roth 401k since I would be in the lowest tax bracket…right?? Man, I could be a great commercial for NBC’s “The More You Know” campaign (that line was so good I had to steal it from my own comment below.)!!
One thing is for sure, my life and my lifestyle have never been traditional, why would my journey to FI be any different? Perhaps these roadblocks are not blocks at all. They are just another opportunity to make this path my own.
Until next time…