Teaching America’s youth and trying to hold onto your sanity at the same time can be a struggle. Especially if both spouses have chosen the most thank-less career path, being an educator. A lot of educators don’t have the time to spend to research all the options available when it comes to their teacher retirement.
The biggest complaint I hear from teacher investors (besides their salary) is not getting a lot of education from their district when it comes to retirement. There’s usually a third party vendor that comes in on enrollment day, talks to you about some other type of investment account and disappears into thin air for the rest of year.
*In this article, I’ll address teachers in Texas, because that’s what state we serve for the most part. Many other states are set up the same way, but make sure to check with the employee in your district that handles benefits for details.
Unlike most employees at large companies, teachers don’t pay into the social security system. Instead they pay into TRS (in Texas that is) which stands for Teachers’ Retirement System. It’s set up basically the same way – you pay into it out of your paycheck (it’s mandatory) and then there’s a benefit down the road when you retire.
- For more on the TRS and its retirement option CLICK HERE
Teacher Retirement Options: The 403b
But what do teachers do if they’d like to invest more? The most common answer (especially if you ask the benefits guy sent by the district) is the 403b. The 403b is named after a specific section of the tax code (much like the term 401k) and set up just like the commonly used 401k. Money is voluntarily taken out of your paycheck and sent to a third-party vendor that holds onto your money and allows you to invest in a few mutual funds. That money comes out pre-tax, so when you start pulling it out when you retire, you are taxed on the amount you take out. For instance, if you put $100 in a 403b and it grows to $200 and you take it out in retirement, you are taxed on the full $200.
The major benefit to the 403b is the income tax reduction you get on the amount you contribute. For example, if you made $40,000 last year and contributed $5,000 to your 403b through the district, you’ll only be responsible for paying taxes on $35,000.
Teacher Retirement Options: The Roth IRA
The other option is investing in a Roth IRA account. A Roth account is funded after taxes are taken out of your check. It’s usually set up at an outside investment firm and the options for investment can vary depending on where you invest. You can set one up in your own name and your spouse can also have an account.
The Roth is sometimes a great option for teachers if they can contribute (there are income limits to who can contribute) because any gains in the account before retirement can be taken out completely tax free in retirement. If you contribute early enough and invest wisely, you can see some considerable gains over the long term.
So if you put $100 in a Roth account and it grows to $200 when you take it out in retirement, you don’t have to pay taxes on the $100 you gained in the account. So the Roth’s major benefit is the tax advantage if there are some considerable gains in the account.
- For more on the Roth IRA CLICK HERE
Teacher Retirement Options: Non-retirement Accounts
An additional investment option would be putting extra cash in a savings or non-retirement account. You’ll be taxed on any money you make each year in the account, but it’s another option for teachers looking to save for retirement.
The tax implications can vary greatly by the types of investments you make in the account.
Teacher Retirement Options: Start a business
Another option I see with a lot of teachers is starting a business. Many of these can be seasonal businesses that you might be able to spend considerable time with in the summer. Some businesses require considerable investment in the early on, but others just require your time. Find something you enjoy doing and see if there is a way to monetize the time you spend on it. If that business grows into a valuable asset, you could sell it down the road or get help running it and use it to help fund your retirement.
Every couple’s situation is different, but contributing to the Roth might be the best place to go first, then use the 403b if you need to contribute more to retirement. If you have other outside investments or income, the 403b might be the better place to go. If that’s the case, you might not be able to contribute to a Roth account anyway.
You might also think about being slightly more aggressive in your investment accounts considering your TRS retirement (much like a traditional pension) is a more conservative piece of your retirement savings.
Make sure you talk to a financial advisor or planner, along with your tax professional to find out which option might be the best for you.