Teachers have many retirement options

Q. I teach second grade for a Pennsylvania Public Elementary School, and after many years of service, I am considering retirement. Can you give me some insight as to my options here?

A. Congratulations and thanks for serving the community for so long. Second grade? My granddaughter is 7 years old and she runs me ragged. I cant imagine dealing with 25 or so 7 year olds all day long, year after year. Once again, thanks.

Pennsylvania Public School employees have a pretty good system for information on this. There are general group meetings available, and before you make a final decision, there is a mandatory one-on-one meeting with the school system retirement representative. You contributed, through payroll deduction, to your retirement plan over the years. So, at retirement time, you can receive back, as a lump sum, all of your contributions and the interest that those contributions made. Please keep in mind that for the most part, the money was never taxed, so you can roll this money over to an IRA if you want, keeping it sheltered from income tax. Its my experience that most people do this. This gives you a lump sum as a financial cushion, in addition to your monthly pension checks.

The Retirement System can give you an estimate of your retirement benefits. This would include what they call Maximum Single Life Annuity, Options 1, 2, and 3.

The maximum benefit would pay the highest monthly benefit to you, but there would be little to nothing to pay to your beneficiary when you die. This works well if you do not have anyone who is financially dependent on you.

Option 1 would pay a little less per month, but could possibly continue the monthly benefit for a beneficiary (its usually around 14 years of total payout between you and a beneficiary). Here you may want to consider your health and your beneficiarys health and your longevity.

Option 2 would pay a monthly benefit to you for your life, and continue that same benefit amount to your designated beneficiary for his lifetime. Here, you would consider what retirement benefits your beneficiary has, and what total income do you need in retirement.

Option 3 pays a little more that Option 2 for your lifetime, but your beneficiary would receive 50% of your benefit for his lifetime. Once again, take a look at your total monthly income needed.

You may have noticed that with these pension plans, after your and your beneficiarys death, thats it. There are no more payments under Options 2 or 3, and Option 1 and the Maximum benefit only have the remote possibility of paying to someone after you and your beneficiary have passed on. There are actuarial reasons for this, but just dont plan on passing your pension on to your grandchildren.

Your retirement benefits are one source of income for you in retirement. Other sources are your spouses benefit (through his employer), social security retirement benefits, and any individual savings or investments that you have. I would recommend that you meet with your financial planner to coordinate all of these sources of benefits so you can design your retirement plan and maximize the benefits for you and your family.

Q. I know we recently had an income tax increase passed in January that only effects the rich, but it seems to me that taxes have got to go up for the rest of us. The Federal government and State and Local governments all seem to be looking for more revenue. Does it make sense to contribute to my 401(k) plan and get a deduction at todays tax rates, only to take this money out and spend it in the future at some possibly higher tax rate? Wont I pay more taxes this way?

A. You raise a good point. It certainly seems that the government needs to raise money, and one way to do this is to tax us more (by either increasing the rates or decreasing our deductions or some combination of each). We dont know exactly what the future tax situation will be, but its important to plan ahead anyway.

While retirement accounts (401(k)s, IRAs, etc.) are valuable as a way to build up a financial resource for the future, they can also be a potential tax problem. These accounts allow us to accumulate money for retirement while deferring taxes until we take the money out. They are not tax free; theyre just taxed later. So, to answer your question, you could be paying more income tax in the future when you take money out of your 401(k) plan. We dont know, and wont know until that time.

I like the approach of Ed Slott, CPA, a renowned IRA expert (you may have read some of his comments in various financial publications, or seen him on public T.V.). He suggests to move money that is forever taxed to money that is never taxed. Some ways to do that would include converting all or part of retirement money to Roth accounts (Roth IRAs and Roth 401(k)s). Roth accounts are income tax free. Any conversion you do would be taxed now at todays tax rates, and then accumulate income tax free. Roth IRAs are retirement accounts, so the money is not available without penalty until after age 59, and the earnings in a Roth account are not available for 5 years. He also suggests that using life insurance is a great income tax free way to pass money on to your loved ones.

There are many details involved with these planning ideas, so you should consult with your financial planner before you make a move.

(Do you have a question about your financial affairs? Financial planning consultant, Robert S. Pennartz, CFP takes calls at 1-302-654-5556, extension 138 or 1-800-366-0632, extension 138. A selection of these questions and Pennartzs responses are published in this column. Anonymity is assured.)

Robert S. Pennartz is a Certified Financial Planner Practitioner at the Financial House, a Registered Investment Advisor, in Centreville, DE. Bob lives in Pocopson Township with his wife and children. He is a registered representative offering securities through Lincoln Financial Securities Corporation, Member SIPC. Lincoln Financial Securities Corporation and The Financial House are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult your individual tax or legal professional regarding your individual circumstances.

Join the Conversation