Retirement account opinions (part 2)
Save for retirement beyond your pension
The pension plans available through service to public schools are awesome. So few careers still offer benefits like these, but will your pension alone provide you enough funds to live comfortably in retirement? I wouldn’t count on it.
As mentioned in Retirement account opinions for teachers (part 1), the combination of your pension and social security (if you paid into social security as an educator; there are some states in which teachers don’t) might be enough, but I wouldn’t count on that either. If you want to retire worry free, odds are you will need to do retirement saving beyond your pension. I do, and have been since the first year I started teaching.
If you are saving for retirement (we’re not talking saving for a home down payment, or fun money, but exclusively retirement) then you’ll want to look into a 403(B) or ROTH IRA. You could consider a Traditional IRA, but for most educators a ROTH will be a better option.
PLEASE NOTE: that the information below is based exclusively on my own experiences and personal research. I am not a financial professional. It is important to be fully informed before making financial decisions and I encourage you to meet with a financial advisor through your school system. You can likely get free financial advice through the company your school system has contracted with to offer financial services including retirement plans. For example: MetLife, AXA Equitable, and VOYA.
A 403(B) for retirement savings
A 403(B) is a retirement plan designed for tax exempt organizations like public schools. Just like a traditional 401K, a 403(B) allows employees to invest in a retirement plan through payroll deductions. Also, just like a 401K, 403(B) plans have yearly limits to how much a person can invest. In 2022, that limit is $61,000 or 100% of the employee’s most recent yearly salary; whichever is less. You must be 59 1/2 to begin withdrawing funds without penalty. A 403(B) often has lower administrative costs than Traditional IRAs and that lower cost is passed down in the form of lower fees which means more money in your pocket.
An IRA for retirement savings
Their are two types of IRAs, Traditional and ROTH. ROTH IRA’s generally make more sense for teachers, but only you and your financial advisor know what is best for your particular situation.
One of the main benefits of a Traditional IRA is that money goes in pretax from each paycheck. Meaning that you are saving for retirement and at the same time you’ve reduced your taxable gross income and, therefore, the amount you will pay in taxes. You are only taxed when you withdraw that money.
This benefit doesn’t generally help teachers because we are not “high income earners.” We aren’t in a high tax bracket and in need of reducing our gross income to reduce our tax burden. We are also likely to be at a higher or similar tax bracket later in our lives so waiting to pay the taxes later isn’t that helpful. If we anticipate being in a significantly lower tax bracket when we are pulling out the money, it might make more sense to go with a traditional.
A traditional IRA requires that you to take a minimum distribution (a given amount of money) from your account starting at age 72.
Money goes into a Roth 403(b) after tax so there’s no immediate tax advantage. The advantage comes later, as the money grows tax free and you can pull that money out tax free upon retirement. Also, in most cases, a Roth allows you to pass any of money left in the account at the time of your death tax-free to your heirs. Depending on the age of your heirs at the time and their circumstances, they could choose to continue to grow the account tax-free for years and then take that money out tax free when they are ready. Roth IRAs also don’t have required distributions.
IRA Contribution limits
In the year 2022, the total yearly contribution limit to all of your traditional IRAs and Roth IRAs is $6,000 (7,000 if you are 50 or older).
Can you have both a 403(B) through your school system’s preferred financial institution AND a personal Traditional or ROTH IRA to save for retirement?
How do I sign up for the 403(B) program offered by my school system?
If you did not sign up for the 403(B) as part of your onboarding process when you were hired, it’s not too late. Ask someone in your building or call HR to find out who the contact person is for the financial institution your school system uses. Call or email that person and they will help you get set up.
They will tell you what you need to bring to your appointment, but generally they will need your most recent tax information, social security number, and your retirement goals (or you may work on setting retirement savings goals together).
The moral of the story is START SAVING FOR RETIREMENT NOW! Not tomorrow, not next week, NOW!
If you found this post helpful, check out some of my other posts:
How I use Mentimeter in my classroom (with screenshots)
Or Start Here to check out my posts curated by theme.
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