Pensions and Your 401(k) or 403(b) — What are you getting yourself into.
While many of us don’t have corporate pensions there are still a significant number of us who can expect to receive a pension at retirement. For purposes of this article, I am going to use our fictional teacher Mary Jane Smith as our example.
Mary Jane is a teacher with tenure and fully expects to help our children learn and grow for many years. As a teacher, she will receive a pension and social security at retirement. One day a friend of hers asks if she should contribute to her 403(b) plan to save tax deferred for retirement. Without missing a beat, Mary Jane says “of course you should, everyone knows that you should put as much as possible in your 403(b) plan”.
Sarah, another teacher, over heard this conversation, tapped Mary Jane on the shoulder and said “If what you believed to be true, turned out not to be true, when would you want to know it?” Right now of course!
OK Mary Jane, here is the question, why are you putting money away in your 401(k)?
To save money on taxes of course.
Actually, you are not saving any money on taxes, you are just postponing your taxes to be calculated at a later date.
You are right, said Mary Jane. Now that I think about it, what I am trying to do is to pay lower taxes in the future because I will be in a lower tax bracket when I retire. Ah! Therein lies the rub.
I have worked with many teachers, federal and state workers and Police officers. If you add their pension with Social Security many will find that they are in the same or higher tax bracket. In fact, when they are forced to take money out of their 403(b) because of the requirement minimum distributions, they find they are paying more in taxes than before retirement EVEN THOUGH THEY DIDN’T NEED THE MONEY!
Instead of their 401(k) or 403(b) saving them money it cost them thousands of dollars.
Of course the next logical question Mary Jane asked, so if I don’t put my money into a 403(b) plan, what should I do. To which I replied, how about a tax free account? A tax free account that is principle protected, grows at a reasonable rate of return and will create a tax free income when you retire as long as you follow the rules.
Remember, just because everyone is doing it doesn’t make it right. Tax deferred accounts can be great for some and not so good for others. Folks with pensions are in a unique position which means the conventional wisdom may not be so smart. TO learn more, give me a call and I will be glad to send you a book discussing the details of this strategy.