Teachers are an essential part of our society, playing a vital role in shaping the future by educating and inspiring the next generation. However, despite the importance of their work, many teachers struggle to plan for their own financial futures. In fact, recent studies have shown that many teachers are woefully underprepared for retirement, with a large percentage lacking any kind of retirement savings.
Retirement accounts are financial instruments designed to help individuals save for their golden years. There are various types of retirement accounts available, each with its own unique features and benefits. We will explore some of the most common types of retirement accounts, including Traditional IRA, Roth IRA, and 403(b).
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Retirement accounts are financial instruments that are designed to help individuals save for their future. The unique characteristics and advantages of each retirement account can determine its suitability for individuals based on their financial objectives. Here are some of the key differences between the most common types of retirement accounts:
Traditional IRA vs. Roth IRA:
- Contributions to a Traditional IRA are tax-deductible in the year they are made, but withdrawals in retirement are taxed as ordinary income. They also have smaller annual contribution limits.
- Contributions to a Roth IRA are taxed in the year they are made, but all future withdrawals are tax-free. Again, this retirement savings account is subject to smaller annual contribution limits as well as subject to income phase-out levels.
Traditional IRA (Individual Retirement Account) is one of the most popular retirement savings vehicles in the United States. It is a tax-deferred account, which means that contributions made to the account are tax-deductible in the year they are made. The funds in a Traditional IRA grow tax-free until they are withdrawn; at which point they are taxed as ordinary income. Individuals are required to start taking required minimum distributions (RMDs) from their Traditional IRA once they reach age 73.
Roth IRA, on the other hand, receives contributions from taxed-today money, so, down the road, distributions are tax-free. Also, the choice to make withdrawals is up to you - no mandatory distributions!
403(b):
- 403(b) is a retirement savings plan that is sponsored by an employer. You hear a lot about 401(k)s, right? Well, 403(b)s are very similar, except they are offered by government and not-for-profit employers.
- 403(b) allows employees to contribute a portion of their pre-tax earnings toward their retirement savings. These plans may also offer an after-tax (Roth) contribution option.
- The benefit of a 403(b) plan is the ability to maximize your contribution savings up to an annual limit set by the IRS. These limits far exceed the contribution limits of a traditional or Roth IRA, thus allowing you to grow retirement assets more quickly.
- What does Pre-tax contributions mean? Money from your earnings goes directly into the retirement plan without being taxed for Federal or State income tax. These contributions also reduce your taxable income each year, saving you on taxes. However, we know nothing is free. Later in retirement, withdrawals from pre-tax (also known as tax-deferred) accounts will be fully taxed at the then-current tax rates. You trade taxation now for taxation later.
- Employers may offer matching contributions to the 403(b)...that’s free money towards your retirement. Ensure you contribute at least the minimum dollar amount necessary to qualify for your company’s matching. Don’t leave this money sitting on the table!
Give Your Future Self the Gift of Financial Security and a Worry-Free Retirement
A 403(b) plan is an excellent savings option for public school employees and non-profit workers, offering tax advantages, investment flexibility, and the potential for employer-matching contributions. However, many teachers fail to utilize this additional retirement planning tool thinking their pension will cover all of their income needs. The truth is a pension typically provides only 50%-70% of your final salary. Ouch! Contact our office today to see how contributing to your school’s 403b plan will boost your retirement when combined with your pension and start taking control of your financial future.