I was talking with a teacher about this the other day so I thought I would share. The teacher told me that him and his wife are no longer eligible to contribution to a Roth IRA so he figured he should start a 403b. So then I mentioned a Roth 403b to him. He then asked me what that was. So I proceeded to tell him it works like a Roth IRA except that there are no income limits, higher deposit amounts and the school had an approved vendor list from which you had to choose.
This is a normal conversation I have with teachers. I usually hear one of two things. I was told to do a 403b and so I started funding one or that they contribute to a Roth IRA. The Roth IRA can work great if you are eligible and you don’t want to exceed the contribution limits ($5,000 under age 50 in 2009). So then let’s look at alternatives that especially come into play when a Roth IRA isn’t available.
Before we get there let’s look at what most people seem to do. They hear from other teachers that they should contribute to a 403b and they do. What they don’t realize is this decision might be hurting their pension. Let’s look at it. I’m going to use Massachusetts numbers because that’s what I am most familiar with. The concept should work with most pensions. So in Massachusetts teachers are contributing 11% of their salary into the pension program. These contributions are made pre-tax so the teacher doesn’t pay taxes on the money that goes into the pension. What this means is that when a teacher receives their pension the money is taxed as ordinary income. A Traditional 403b works the same way, pre-tax contributions, fully taxable withdrawals.
Before January 1st, 2006 the only other payroll deduct plan available to teachers besides their pension was a Traditional 403b. So when people wanted to save for retirement that was the only option they knew about so they thought it was best. Now times have changed. There are more options available. The biggest of these is a Roth 403b. The biggest benefit of this is that the withdrawals are tax-free.
The great thing about the Massachusetts teacher’s pension is that they are probably going to receive 80% of their income in retirement. You take that number and take away their extra tax deductions they might have today; they probably end up in the same tax bracket in retirement. If on top of this you add a Traditional 403b then you are adding more taxable withdrawals. This could cause you to be in a higher tax bracket if you are not careful. This could hurt your pension income. So learn about your Roth 403b options. Ask your employer for their approved vendor list and which ones offer a Roth 403b. Learn your options and more importantly ask questions.
Related posts:
{ 3 comments… read them below or add one }
In MA, is there any employer matching on the 403b?
Very interesting site. Hope it will always be alive!,
For teachers, the majority of time there is not a match. However, a 403b is not just for teachers. So for a non-profit or a church that doesn’t have a pension they are more likely to have a match in their 403b account. Just remember the match is the same whether you contribute to a Traditional 403b or a Roth 403b.
{ 1 trackback }