The best way to fund a purchase is to use tax deferred amounts from other retirement accounts. It is a bad idea to use after-tax money to fund the purchase because the withdrawal will be taxed again, and it will be harder to raise the money to purchase airtime with after tax dollars.
Most people should use a regular IRA, 401k from a previous employer, or their 457 retirement to fund a CalPERS Airtime Purchase.
Roth IRA Account
Don’t use the funds in a Roth account. It is an excellent savings vehicle which doesn’t tax the investment gains. There are limits as to how much can be put into a Roth IRA per year. If you take money out, it will take many years to rebuild it back because of the Roth annual contribution limit.
Traditional IRA Account or 401(k) Account
This is a better choice. In 2010, you’re allowed to put in $16,500 per year with additional catch-up provisions for those who are over age 50. The money both of these are tax deferred. The funds will remain tax deferred until withdrawn from CalPERS.
457 Deferred Compensation Retirement Account
This is the best choice for a CalPERS airtime purchase. While you are employed at the same municipality with the 457 retirement account, you cannot withdraw funds. For most public sector employees, you will wait decades before you can access the money. If you have the choice between a 401(k) from a previous employer and a 457 retirement account, choose the 457 retirement account first. The 401k funds will be accessible if you ever need it in an emergency. If you leave the 457 retirement account with your employer, you cannot access the money in an emergency.
Some 457 plans have a loan provision to allow temporary access to your funds. There are two problems with this:
- 457 plan loans have to be repaid in full with interest using after tax dollars.
- You have access up to a maximum of $50,000 or 50% of your account, whichever is lesser.
The bottom line is that the best way to fund an airtime purchase is to rollover your entire 457 plan. If you still come up short, use an old 401k account or IRA account to make up the difference. Try very hard not to use after tax money like a regular brokerage account or Roth IRA.