Preparing for retirement is always a smart financial decision no matter your career or age. The earlier you start to put money aside for your future, the more prepared you will be when you are ready to retire from your career. Thankfully, in the state of New York, teachers generally receive over $45,000 per year as a pension.1 This should hopefully help you feel more secure in your finances after you retire. However, saving is still important to help ensure you can live a comfortable lifestyle during retirement. As a teacher, you have access to 403(b) and 457(b) qualified retirement plans. Both of these options can be great for saving long-term, but they unfortunately do not give you much flexibility. An excellent retirement account alternative teachers should consider is called a Roth IRA. In this article, we are going to discuss why this type of account should be considered by teachers.
1. Your Savings Are Not Taxed At Withdrawal
A major downside to employer plans is that they are taxed once it is time to withdraw from them, since they are invested with pre-tax dollars With your pension and 403(b) plan, you could be in the same income tax bracket as you are in now, if not potentially higher. This means at least 22 percent of your retirement savings will most likely be given to the government before you see any of your money. While taxes are necessary, this can be disappointing after working hard for several years to save. With a Roth IRA*, you will not have to deal with the same retirement taxation as qualified accounts since the funds are initially invested with after tax dollars.
Withdrawals from Roth IRAs are generally tax-free after the age of 59 and a half, as long as the account has been open for at least five years. This rule feels as though it is meant for teachers, as the average retirement age of teachers is around 59 years old.2 If you are faced with an emergency and need to withdraw from your Roth IRA savings, can access your funds and may be able to keep more of your money than you would with a traditional employer plan. So, investing in a Roth IRA in addition to your employer plan could be a way to help ensure you have enough in savings in after tax dollars.
2. Roth IRAs Are Not Subject to RMDs
Almost every retirement plan other than Roth IRAs are subject to required minimum distributions, or RMDs. This is a rule3 set in place by the IRS to prevent you from keeping your savings in your retirement account forever. With other retirement plans, you must start withdrawing your savings after the age of 70 and a half, beginning in 2020 it is 72. If you do not withdraw the minimum rate, you will have to pay a 50 percent excise tax on the original minimum amount. Typically, you can expect the minimum rate to be about four percent of your total saved. Many people worry that they will run out of money being forced to take RMDs from their retirement plans, which can be a valid concern. It is considered preferable to let your money grow if you don’t need it.
With a Roth IRA, you can allow your money to remain in your account for as long as you want. This can be a great option if you want some money to fall back on if you think you will deplete your qualified accounts with RMD requirements. You will be able to withdraw your required minimum distributions while feeling confident knowing that you still have investments within your Roth IRA account.
3. Greater Control Over Your Savings
Considering Roth IRAs may generally be withdrawn tax-free and do not require minimum distributions, they can provide you with more control over your savings. With 403(b) and 457(b) plans, you are limited as to when you can withdraw your money. This can be great for people who don’t trust themselves not to withdraw their retirement savings prematurely. However, if you would like the ability to access your retirement savings, a Roth IRA may be an option to consider. As mentioned above, if you decide to withdraw your savings early, the Roth IRA may provide easier access and you would not have to request a hardship withdrawal, giving you more complete control over the money you have saved for your future.
4. Diversify Your Retirement Savings
Another benefit to Roth IRAs is that they can help you to diversify your retirement savings. The saying “don’t put all your eggs in one basket” can be applied to retirement savings accounts. Despite investing in a 403(b) or a 457(b) qualified retirement plan, many teachers choose to diversify their retirement savings with a Roth IRA or high-interest savings account. Choosing to have multiple accounts may help you to feel more confident for your future. Roth IRAs have different benefits when compared to other retirement plans, so it may be wise to look into taking advantage of a Roth IRA. As mentioned above, using a Roth IRA for its tax-advantages can be helpful, or you can invest in a Roth IRA if you know you want additional control over one account. However, you don’t have to solely put your retirement savings into a Roth IRA, as you should take advantage of any potential employer matching contributions. Roth IRAs are simply an addition to your employer plan.
5. Easy to Open
Another benefit of Roth IRAs is that they are incredibly easy to open. First, you need to make sure you are able to open one, as there are income restrictions.4 It is recommended you read through the pros and cons of each type of Roth IRA investment account to see which one is most appropriate for your situation. You should also look at reviews for these accounts and companies to see which ones are well rated.
If you are unsure which Roth IRA may be right for you, please feel free to contact us. We are here to answer any questions you may have about retirement accounts and will help you figure out which one is best for you as a teacher and more importantly to fit your personal needs.
*Contributions to a Roth IRA are made with after-tax dollars, which are not eligible for an income tax deduction and may generally be withdrawn tax-free at any time. Earnings may generally be withdrawn income tax-free if the individual has held amounts in a Roth IRA for at least 5 years and the withdrawal is made after age 59 ½. If the withdrawal is made before the 5-year period and age 59 ½, income taxes and an additional 10% federal income tax penalty may apply. Other exceptions may apply.Diversification is a method of positioning assets among major investment categories in an effort to manage risk and enhance returns. However, it does not guarantee a profit or protect against loss.
1 “Update: What is the Average Teacher Pension in My State?”, Max Marchitello TeacherPensions.org, January 10, 2019
2 “Why Your Retirement Age Matters”, Amelia Josephson SmartAsset, July 23, 2019
3 “Retirement Topics — Required Minimum Distributions (RMDs)”, IRS, February 5, 2020
4 “Amount of Roth IRA Contributions That You Can Make for 2020”, IRS, January 10, 2020
The subject matter discussed in this article is for informational purposes only. It is not intended and should not be relied upon as investment or financial advice and does not constitute an offer, recommendation, or solicitation.
