Retirement...

[ScrimpAndSave]

I don't think too much about retirement...but I really need to.

I'm a teacher and came across some language in my contract:

The retiree must have a total of thirty (30) years of service in education, twenty-five (25) of which must
be in the Eastern Area School District and be at least age 55. Said years of service must be verified
through the Pennsylvania State Employees' Retirement System (PSERS). The retiree must take the
incentive in the contract year or the following contract year the individual meets all three criteria.


I know that 7.5% of my income is placed in a pension. I heard that we have a pretty sweet retirement package. I am also hoping to max out my Roth every year after 2009. What else do I need to do? I have 25 years left of teaching (if I stay a teacher - I just got my principal certification and hope to move onto that within the next few years).

[jIM_Ohio]

What is the value of the pension relative to paycheck? 50% of pay, 75% of pay, 100% of pay... is health care coverage included? Do you pay extra for the health care coverage?

Once you know what the pension replaced (guessing around 75% of the average of last 3 years pay), then you know what is needed financially (cover 25% of pay with savings or cut expenses 25% and save nothing).

In addition you need to consider that if your spouse has a 401k, the combination of a pension plus 401k can easily put you in a higher retirement tax bracket than you are now (so stashing money in a Roth IRA is a good idea).

What else to do?
You have heard me state before to save 20% of gross (15% for retirement and 5% for short term expenses).

The pension covers 7.5% of the 15%. So put 7.5% of your gross into some type of retirement accounts (Roth or other). The set aside 5% into cash accounts for other expenses.

In short term the 5% will probably get spent every year. As time passes the 5% increases in value (with raises) and the short term needs become fewer (because you have your furniture, car and vacations funded), plus you have debt eliminated (if there was any) so this 5% becomes a way to put retirement planning into overdrive. Maybe open a taxable account with muni bonds and contribute a portion of 5% to this fund every month or year.

At times there are buyouts or early retirement options. If you have other savings it is easier to take advantage of those opportunities.

[ScrimpAndSave]

Thank you, Jim! I will have to see how much % the pension covers...it's nice to know it is there. Healthcare is included.

[meatloafkend]

Okay, so a Roth IRA doesn't put you into another tax bracket? Is that how I should understand it?

[jIM_Ohio]

Originally Posted by meatloafkend

Okay, so a Roth IRA doesn't put you into another tax bracket? Is that how I should understand it?

What do you mean? The question can be answered more than one way.

[kork13]

Contribuing to a Roth IRA will not change your tax bracket.

Withdrawing from a Roth IRA can change your tax bracket, because it is considered regular income. Depends on how close your income is to the top end of your tax bracket.

"Lower tax bracket" and "Roth IRA" do not belong in the same sentence--nothing you do with a Roth can bring you into a lower tax bracket, unless you previously were withdrawing from one then stop doing so.

[Snave]

Originally Posted by kork13

Contribuing to a Roth IRA will not change your tax bracket.

Withdrawing from a Roth IRA can change your tax bracket, because it is considered regular income. Depends on how close your income is to the top end of your tax bracket.

"Lower tax bracket" and "Roth IRA" do not belong in the same sentence--nothing you do with a Roth can bring you into a lower tax bracket, unless you previously were withdrawing from one then stop doing so.

What? I am confused. Roth withdrawals (assuming you meet the 59.5 age requirements and have had the money in for 5 years) are tax free. That is the whole point of the roth. You paid taxes on it initially. As for withdrawals before you meet the age requirements, you can withdrawal your contributions after 5 years usually without penalty. Since you have already paid tax on that money (contributions) , it would also not be considered taxable income. Now, if you are withdrawing any investment gains, that is going to bite you from a tax standpoint and penalty standpoint if you are under 59.5.

[jIM_Ohio]

Please note that tax free and income are not "opposites". You still need to report Roth income on the tax form, and the income from the Roth is not taxed, but it could make other income (such as SS) taxed.

[responduser]

Originally Posted by jIM_Ohio

Please note that tax free and income are not "opposites". You still need to report Roth income on the tax form, and the income from the Roth is not taxed, but it could make other income (such as SS) taxed.

Need a cup of tea

[ScrimpAndSave]

Thank you all.

I just wasn't sure if I should be doing anything else.

I will try to find out more about my pension!

[noppenbd]

Originally Posted by jIM_Ohio

Please note that tax free and income are not "opposites". You still need to report Roth income on the tax form, and the income from the Roth is not taxed, but it could make other income (such as SS) taxed.

Roth IRA withdrawals do not count towards "other income" as defined by the IRS for deciding how much of SS is taxed.

See:
Tax on Social Security

And page 2 of Pub 915:
http://www.irs.gov/pub/irs-pdf/p915.pdf

You do have to file Form 8606 if you receive a nonqualified distribution, but if it is a qualified distribution, I don't think it gets reported anywhere. Correct me if I'm wrong.

Short answer is qualified (i.e. you are over 59.5) Roth withdrawals do NOT affect your tax bracket in any way.

[simpletron]

Instructions for Forms 1099-R and 5498 (2008)

Roth IRAs. For distributions from a Roth IRA, report the gross distribution in box 1 but generally leave box 2a blank. Check the “Taxable amount not determined” box in box 2b. Enter Code J, Q, or T as appropriate in box 7. Do not use any other codes with Code Q or Code T. You may enter Code 8 or P with Code J. For the withdrawal of excess contributions, see Roth IRA on page 8. It is not necessary to mark the IRA/SEP/SIMPLE checkbox.

so if you take a distribution from a roth, you will get a 1099-R from the financial institution which is included in your return. then you must fill out the roth section on form 8606 to determine the taxable amount, which is non-zero only if you took a non-qualified distribution. the taxable amount from form 8606 is the only thing that can affect your taxes in anyway, so qualified distribution do not affect the taxes of other income.

[Joan.of.the.Arch]

While you are checking on that pension, I think you should also check on what "healthcare is included" means. I doubt if you have paid health insurance provided in retirement. I doubt if you even get to continue it as it is now, where probably you pay a portion and the employing school district pays a portion of the insurance, More likely, the retirement benefit is simply that you get to participate in the group plan, but that you pick up the entire cost of your participation, including that which the school district now pays. So, I think you might need to make sure you save enough to pay for your own health insurance in retirement.

Even if the retirement benefits now provide 100% health insurance paid for, will that continue to be the case? In my state retirement health benefits have a recent history of being cut when general negotiations for current employees are being done. Some retiree benefits are not set in stone. Unfortunately healthcare has been one of them.

[noppenbd]

Originally Posted by simpletron

Instructions for Forms 1099-R and 5498 (2008)


so if you take a distribution from a roth, you will get a 1099-R from the financial institution which is included in your return. then you must fill out the roth section on form 8606 to determine the taxable amount, which is non-zero only if you took a non-qualified distribution. the taxable amount from form 8606 is the only thing that can affect your taxes in anyway, so qualified distribution do not affect the taxes of other income.

True, just an addition that once you are 59.5 you do not need to list Roth distributions on form 8606 if your account has been open for 5 years. These would by definition be qualified distributions. See instructions for form 8606, Line 19:

Instructions for Form 8606 (2007)

[jIM_Ohio]

Originally Posted by noppenbd

Roth IRA withdrawals do not count towards "other income" as defined by the IRS for deciding how much of SS is taxed.

See:
Tax on Social Security

And page 2 of Pub 915:
http://www.irs.gov/pub/irs-pdf/p915.pdf

You do have to file Form 8606 if you receive a nonqualified distribution, but if it is a qualified distribution, I don't think it gets reported anywhere. Correct me if I'm wrong.

Short answer is qualified (i.e. you are over 59.5) Roth withdrawals do NOT affect your tax bracket in any way.

Thank you- I did not know for sure and am learning about what is included on the 1040 and what is not. Thx

[ScrimpAndSave]

Joan...thanks for mentioning that...you are right...it does not include my health insurance exactly...this is what my contract says:

The benefits provided herein shall be for the retiree and if applicable, his/her spouse, and will continue until the retiree becomes eligible for Medicare. The District’s contribution to the annual retirement allowance for providing health insurance and prescription drug coverage for each retiree shall be $5000 deposited into a health reimbursement account.

Any health insurance refunds made available to the retiree through PSERS shall remain with the retiree and shall not offset or diminish the District’s obligation to provide the full amount of their annual retirement contribution for each retiree as defined in part 3 of this section.

The retiree shall receive written notice from the District of the cost of the health insurance by October 1st of the fiscal year in which the cost occurs and will be required to reimburse the District upon receipt within sixty (60) calendar days.

In the case of married couples employed by the Eastern Area School District where one is retired, the retiree may select health insurance, prescription drug coverage, dental insurance coverage, etc. as a spouse under the terms of the employed spouse’s benefit package. Upon the retirement of the last employed spouse from the District, both the retiree and his/her spouse shall each be entitled to their respective retirement allowance and may apply said amounts toward the cost of individual health insurance and prescription drug coverage as provided herein.


Is this a crummy deal?

[MYOM]

I can give you one piece of advice. Consider having half of your savings in a qualified plan such as a 403b plan and half outside of your 403b by the time your retire. It will give you more flexibility to pick the amount of income you wish taxed in any given year after you are retired. Mutual funds work best inside a qualified plan and bonds work best outside a qualified plan.

Congratulations on the principal certification.

Dan Clemons, author and retired Certified Financial Planner

[jIM_Ohio]

Originally Posted by MYOM

I can give you one piece of advice. Consider having half of your savings in a qualified plan such as a 403b plan and half outside of your 403b by the time your retire. It will give you more flexibility to pick the amount of income you wish taxed in any given year after you are retired. Mutual funds work best inside a qualified plan and bonds work best outside a qualified plan.

Congratulations on the principal certification.

Dan Clemons, author and retired Certified Financial Planner

Dan- I think the red portion is BAD tax advice.

A qualified plan will be taxed at ordinary income rates. If you put stocks inside the plan, you are taking something taxed at 5% and converting that to 10-15% taxes or taking something taxed at 15% and converting it 25-28-33-35% taxes. Not including state taxes either.

If you held the stocks outside the qualified plan, you could get either the 5% or 15% tax rates which are much lower (3X lower in some cases) tax rates than if held inside the qualified plan.

In addition bonds will be taxed at ordinary income rates whether inside a plan or outside a plan, so if holding bonds, holding them inside a plan makes more sense relative to other portions of portfolio.