Listener Questions: Tips for a Smarter Retirement, Ep #179

Are you or someone you love a teacher, firefighter, or government worker? If so, you might be impacted by two little-known Social Security provisions—the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These rules have reduced or even eliminated Social Security benefits for millions of hardworking Americans.

But change is finally here. The Social Security Fairness Act could make a massive difference for retirees like you. Today, we’re breaking down what this legislation means, who it impacts, and how it could completely transform your retirement.

Plus, I’ll answer your listener questions about:

• How to avoid early withdrawal penalties on retirement funds if you retire before 59 ½
• Contributing to a Roth IRA when you don’t have a paycheck
• Navigating deferred compensation plans without creating a tax headache
• What happens to your HSA funds after retirement

If you’re ready to maximize your retirement benefits and make confident decisions about your future, you’re in the right place. Let’s dive in!

You will want to hear this episode if you are interested in…

• [4:10] What we’re covering in today’s episode
• [5:29] What’s happening with Social Security
• [6:33] Understanding the Social Security Fairness Act
• [11:35] Potential changes to how Social Security is taxed
• [15:57] Listener Question #1: Avoiding an early withdrawal penalty
• [19:27] Listener question #2: Can you contribute to a Roth IRA without a paycheck?
• [23:17] Listener question #3: Deferred compensation plans 
• [27:31] Listener question #4: What happens with HSA plans when you retire?
• [28:57] Listener question #5: How do you get a spousal benefit from an ex?
• [31:17] Listener question #6: How do you help retired family members?

The Social Security Fairness Act

If you’re a teacher in the public school system in Missouri, you don’t pay into Social Security. You are part of a teacher’s pension. 15 states don’t require teachers to pay social security. Government workers, firefighters, etc. may get a pension. Because they didn’t pay into social security, 

Teachers in 15 states (and some government employees) aren’t required to pay into Social Security. Instead, they qualify for a teacher’s pension. For many years, that meant they got a reduced Social Security benefit—or none at all. 

The Social Security Fairness Act bill repeals two provisions that led to the reduced benefits:

• The Windfall Elimination Provision (WEP): This reduced the Social Security benefits you were eligible to receive based on your earnings record.
• The Government Pension Offset (GPO): This provision meant that you’d only receive a dollar amount that goes above and beyond two-thirds of your pension for any spousal or survivor benefits you’re eligible for, leading to little or no Social Security benefit for survivors.

3 million people were negatively impacted by these provisions because the government thought they were “double-dipping,” by getting both a pension and Social Security. 

Because of the Fairness Act, you’ll be eligible for full spousal and survivor benefits or their full benefit for any years they paid into Social Security.

I work with one teacher who was going to get practically nothing from Social Security. Now, she will get her full spousal benefit at age 67 (half of her husband’s), which will be almost $2,000 a month over her lifetime. It’s drastically changing her retirement outlook.

Can you avoid an early withdrawal penalty?

A listener retiring at 57 due to health reasons has a significant amount of savings in his 401(k). He wants to withdraw funds while avoiding the 10% early withdrawal penalty that typically applies to those under age 59 ½. Is this possible?

One option is using a 72(t) distribution, which allows penalty-free withdrawals from a traditional IRA. However, there are rules:

• You must take equal payments for at least five years or until you turn 59 ½, whichever is longer.
• It’s critical to follow the distribution schedule exactly, or you’ll owe the 10% penalty retroactively on all prior withdrawals.

Another potential solution is specific to 401(k) accounts. Many plans include a provision allowing penalty-free withdrawals starting at age 55 if you’ve left your job.

Be sure to consult a tax advisor to explore the best option and ensure compliance with these rules.

Why you need to be careful with deferred compensation plans

Deferred compensation plans allow you to delay receiving a portion of your income to reduce your current taxable income. These funds can be invested similarly to a 401(k), but there’s a key difference: all contributions are pre-tax dollars, meaning you’ll owe taxes when you withdraw the money.

When setting up a deferred compensation plan, you’ll choose how to receive the funds—whether as a lump sum, spread out over several years (e.g., 15 years), or another option. Once you make this decision, it cannot be changed. This lack of flexibility can lead to significant tax challenges, especially if a large payout pushes you into a higher tax bracket.

Before contributing to a deferred compensation plan, work with a financial advisor to develop a tax strategy. Getting a second opinion can help you avoid costly mistakes and ensure you’re prepared for future tax implications. Without careful planning, you could face an unexpected tax burden down the road.

Listen to hear more answers to the questions that you’re asking!

Resources & People Mentioned

• 3 Steps to Retirement Planning
• The Social Security Fairness Act
• Section 72(t)