Money & Policy

Retirement Planning Advice for Public Employees

Some may be eligible for an extra tax break to save for retirement

Most retirement planning articles talk about 401(k)s, because these retirement plans are aimed at people who work for companies. But public employees who work for government agencies and state colleges or universities have special retirement-planning rules. If you’re a public employee in your 50s or 60s, you’ll want to know about them so you don’t miss out on some special tax breaks you may be entitled to claim.

Take the catch-up rules for 403(b) retirement plans for public employees. “Most public employees wouldn’t be real familiar with them,” said Darlene Dailey, vice president of business development at IPX, a record-keeping platform for retirement plans.”

The Special Catch-Up Rules for Public Employees

The 403(b) catch-up rules are especially beneficial for long-term public employees. And they’ve become particularly helpful now that more people are staying on the job longer than in the past.

Here’s how they work: If you’ve worked at the same public employer for at least 15 years and your plan permits, you can save an extra $3,000 annually — tax-deferred — if you haven’t maxed out your 403(b) contributions in earlier years. This is known as the Maximum Allowable Contribution limit or MAC. (There’s a lifetime limit of $15,000 for this special catch-up rule.)

For 2018, this means you’d be allowed to save up to $18,500 for the standard limit plus as much as $6,000 allowed by the normal catch-up rules available to people 50 or older and up to $3,000 for the 15-year catch-up rule.

But, Dailey notes, many public employers with 403(b)s don’t permit the special catch-up rule for retirement savings.

What You Should Find Out

Consequently, if you are a long-term public employee with a 403(b) plan and can afford to save a significant amount for retirement, contact your retirement plan providers to see if they allow MAC contributions.

“You need to have some good counseling,” if you have a 403(b) plan, noted Dailey. That’s because many plans have more than one company offering retirement-savings options, so the rules can get complicated.

You may also want to talk with a Certified Financial Planner about the effect your 403(b) plan contributions could have on your tax bill, especially if you’re considering taking advantage of the catch-up rules. “Increasing the amount you contribute could push you into a lower tax bracket,” said Dailey. “Being able to talk with someone who understands the tax bracket breakpoints could be very meaningful.”

A financial adviser can also be helpful if your state government has changed, or plans to change, the retirement-plan rules for public employees. “There’s a lot of pressure for legislatures to try to come up with provisions to prolong the longevity of plans,” said Dailey. Translation: reducing benefits for future retirees.

Reducing Future Retirement Benefits for Public Employees

Prospects are growing because the proportion of public employees to retired public employees is on the decline at the same time that people are living longer.

Susan Banta, director of research reform for The Pew Charitable Trusts, recently told a National Conference of State Legislatures meeting: “Pension systems are vulnerable to the next recession.”

Your level of concern will likely depend on how close you are to retirement.

“Typically, when state pension plans are looking to make a change, they will safeguard folks near retirement and ‘grandfather’ them in within a number of years of retirement,” said Dailey. “But you need to know exactly how it works for you.”

Often, public employees are offered tax-deferred annuities for retirement savings. These financial vehicles can be particularly confusing and their fees can be hard to decipher. “You need to be an informed consumer when it comes to annuities,” said Dailey. “Today’s annuity products are not like our grandparents’ annuities were.”

Her advice: Ask your 403(b) provider “to explain every fee that can touch my account.”

RIchard Eisenberg, editor at Next Avenue wearing a suit jacket in front of a teal background.
By Richard Eisenberg
Richard Eisenberg is the Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and Managing Editor for the site. He is the author of How to Avoid a Mid-Life Financial Crisis and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Follow him on Twitter.

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