All members belong automatically to the public pension system, which entitles all vested employees to a fixed, predictable pension at retirement age. In addition, all employees are eligible to join either — or both — voluntary retirement savings programs: the 403(b) plan, which operates like a 401(k); and the 457 plan, which also operates like a 401(k). Below is a summary of retirement and tax-deferred savings plans available to our members along with some cautionary notes.
Please Note: None of the information below is meant as a substitute for good retirement planning. All members are urged to seek outside professional advice before embarking on a retirement savings program.
- Public Pension
Participation is mandatory under state law. Vested employees obtain a pension at retirement.
Retirement is governed by Massachusetts General Laws Chapter 32. Your contribution depends upon the date you were hired.
Members should check their pay stubs to make sure the correct amount is being taken. If there’s a mistake, it should be reported immediately by contacting the State-Boston Retirement Board in Room 816 at City Hall. Their number is 617-635- 4305.
A simple equation is used to determine your retirement allowance.
- Your age factor (55 =1.5, 56=1.6, etc.) is multiplied by the number of years of creditable service. This yields a percent.
- Next, average your three highest salaried years and then multiple the percent by that average. The maximum percent is 80%. This amount would be your estimated yearly retirement benefit.
- Dividing that amount by 12 gives you a good idea of your monthly benefit.
These figures are, of course, all before taxes numbers.
Retirement paperwork can be confusing. So, too, can be the bureaucracy at the retirement board’s office. It’s advisable to go into the retirement board 3-5 years before you’re planning to retire to get a good faith estimate. Call and make an appointment with one of the customer service reps. This is also a good idea for members who have additional service outside of the school department as this time can be consolidated or added to your creditable years of service.
If you plan to leave the system prior to retirement, consult the BTU before withdrawing your funds.
Members can also contact BTU Field Rep Michael McLaughlin for assistance in any of these areas. Michael is on the State-Boston Retirement Board. Michael will hold two seminars this year to acquaint members with the ins and out of retirement. Check our events listings for the next seminar.
For more information:
- Social Security
Massachusetts public employees do not pay into Social Security. Employees can, however, accrue Social Security credits at any time in non-public employment. Those with Social Security credits can combine a Social Security pension with a teacher (public) pension, but some restrictions and offsets generally apply.
Call the BTU for detailed, written explanation. Or check out this Social Security publication or this Social Security publication for a discussion of the restrictions and offsets. These are most important topics for those who expect to get some benefit from Social Security credits.
Log onto the Mass retirees websitefor current Social Security for news pertaining to public employees
- A Tax-Sheltered Annuity (TSA) or 403(b) Plan
A Tax Sheltered Annuity (TSA) or 403.B plan is a tax-saving/retirement planning device available to school employees that allows you to shelter income from federal taxation and state taxation. Participation is voluntary.
Your funds are invested in a financial vehicle (mutual fund, variable annuity, fixed annuity) of your choosing, and they are allowed to grow tax-deferred until withdrawal. At withdrawal, all funds are taxed as regular income. Under most circumstances a 10% IRS penalty is imposed on withdrawals prior to age 59.5. (With some restrictions, loans are allowed prior to age 59.5.)
Similar in many regards to a deductible IRA or a 401.k plan, a TSA is generally more flexible. Here’s how a TSA works:
Let’s say you want to save $50 per paycheck using a TSA. (Incidentally, TSA’s must be done through payroll deductions.) Assume you gross $2,000 per paycheck for 26 checks, at an annual salary of $52,000. Over 26 paychecks your TSA will amount to $1,300. For federal and state tax purposes this person will show an income of $52,000 – $1,300 or $50,700.
In effect, the above teacher has “sheltered” the $1,300 from federal and state taxation and will be taxed on the $50,700, not the $52,000. Assuming a tax bracket of 28% federal and 6% state, the $1,300 deduction in effect costs the teacher only $858. Not only that, the interest (or the growth, depending on which savings mechanism you choose to invest in) earned on the $1,300 will be allowed to accumulate tax-deferred year after year.
Although you are merely postponing taxes, not avoiding them, this process of tax-deferral works to your advantage by allowing what moneys would ordinarily be lost to yearly taxation to “work” for you by being reinvested and generating income themselves.
A few last points: The 2010 limit is $16,500 per year, with an additional $5,500 for those over 50. In addition, under certain circumstances, there is a lifetime “catch-up” provision that allows an even greater yearly reduction.
With a 403.(b)/TSA plan you are required to take a minimum distribution from your account balance, as defined by the IRC, no later than by April 1 of the year after you reach age 70 .5 or by April 1 of the year following your separation, whichever is later.
It is suggested that you choose a few companies and research each plan by talking to a sales representative. Should you decide that you want to get a TSA, the company representative will provide you with a Salary Reduction Agreement that you will bring or mail to the School Department’s Payroll Office.
To cancel an annuity, you must write your insurance or mutual fund company, the School Department’s Payroll Office, and the City Treasury, Room M-38 Boston City Hall, 1 City Hall Plaza, Boston, MA 02201. Enclose your social security number.
All 403(b) companies are not created equal. Some companies and the plans they offer are better than others. You are advised to investigate fully before you sign on the dotted line. What’s more, some of the companies are insurance companies, and their plan offering includes variable annuities, which are insurance products that contain higher fees.
As an insurance product, variable annuities often contain expensive insurance fees for the consumer. It is often said that these plans are “sold,” not “bought.” You are advised to investigate the differences in plan costs before you sign on the dotted line. The differences between plans are varied, and include insurance fees, surrender fee charges, and plan design fees. All of these should affect your decision and bear serious investigation. You are urged to consult with an independent financial professional before committing to any plan and any salary reduction agreement.
A word of caution: Vendors walking the halls at your school or visiting you in the teacher’s lounge have no special license from the city. Their plans do not operate with any special imprimatur from the city. The vendors are by and large salesman and saleswomen selling an insurance product. Before agreeing to any salary reduction, you are advised to consult with a licensed independent financial planner. Otherwise you may be purchasing what may be a lifetime product that will carry with it a heavy lifetime penalty for withdrawal.
- State's Deferred Compensation or 457 Program
Similar in many ways to a 403(b) Plan, the state’s Deferred Compensation Plan is administered by Great West (1-877-457-1900). It allows you to place pre-tax money into a tax-deferred account composed of a variety of stock and bond mutual funds. Your account is allowed to grow tax-deferred without being taxed until withdrawal, normally at retirement. Read about the state’s Deferred Compensation 457 SMART Plan for public employees, and see this flyer from the City of Boston for more.
In the state’s 457 plan, all the homework has been done for you, as the state has chosen the mutual funds for you. The funds chosen are both actively and passively managed (index) funds. You choose only how much you wish to set aside and where you wish to allocate your funds. Fees are minimal, much lower than in 403(b) plans generally and monitored by the state.
Unlike loans from a TSA, 457 loans are just about impossible to obtain, as they must meet strict federal guidelines as to the definition of an “unforeseeable financial emergency” resulting from specific reasons beyond your control. On the other hand, upon separation from service at any age, one may withdraw funds without an IRS penalty being imposed. Contribution limits are as above with a TSA. As above, too, the 457 Plan has a make-up provision that allows a greater contribution in limited circumstances.
Many other former restrictions of 457 plans have been eliminated under the 2001 tax law changes.