CalPERS or CalSTRS members who meet the requirements for years of service and retirement age will receive a set pension amount once they retire. However, this pension amount rarely replaces 100 percent of your pre-retirement income. Most retirees of public education organizations will need at least 90 if not 100 percent of their pre-retirement income to maintain their desired standard of living. Luckily, there are supplemental savings plans which can provide you with additional income during retirement.
In early 2006, a number of 403(b) and 401(k) plans allowed for after-tax contributions. In some instances this could allow tax-free withdrawals so long specific requirements are met. One such requirement being that the contributions must be in the plan for five or more taxable years and you are 59 1/2 years or older.
It is important to note that you will face penalties for withdrawing before age 59½.
Tax-exempt entities under section 501(c)(3) of the IRS code, including public schools, universities, colleges, state and local governments and charities, can offer 403(b) savings plans in addition to a defined benefit pension plan like CalPERS or CalSTRS. A 403(b) plan is strictly voluntary. When you sign up for this type of plan, you can contribute pre-taxed income through a payroll deduction. This money will grow, tax-deferred, until you retire. Once you retire and begin drawing from the plan, you will pay taxes.
There are a wide range of benefits to contributing to a 403(b) plan, including:
Contributions are Tax Deductible – When you contribute to a 403(b) plan, you not only contribute from your pre-tax income, but you can also deduct your contributions from your federal tax payment.
Multiple Investment Options - 403b plans allow multiple providers to administer the plan, each offering a range of investment options.
Taxes are Paid When Money is Withdrawn – You will have to pay taxes on your contributions, but not until you withdraw from the plan during retirement. At this time, you will most likely be in a lower tax bracket, meaning you will pay less tax.
There May be a Roth Option – Many employers allow Roth contributions to a 403 b plan, meaning you will make contributions from your taxed income. However, when you withdraw from the Roth portion of your plan, you will not have to pay taxes on it.
Savings Will Grow Tax-Free – You do not have to pay taxes on interest, capital gains or dividends on the money in your 403(b) account.
Loans Could Potentially Be Taken Against Your Plan – Some 403(b) plans allow holders to take a loan from the plan. Requirements and consequences vary.
Contribution Limits are Higher Than for IRAs – In 2015, contribution limits are set at $18,000. Participants who are 50 or older and have 15 years of service with the same employer can contribute an additional $6,000.