A Case For the Roth 457(b) at the Los Angeles Unified School District

 

The guest author is a Los Angeles Unified S.D.’s (LAUSD) teacher at Hamilton HS. For the past few weeks, Larry and I have been emailing each other about making the Roth 457(b) a reality for all LAUSD’s employees. Our Retirement Investment Advisory Committee voted to approve the Roth option a year ago, but LAUSD said there was not enough demand and payroll system could not handle it.

A year has passed and apparently things are beginning to look much better. Larry attended last month’s committee meeting and voiced his request to the committee which includes benefits administration, legal counsel and the chief financial officers representatives. The Chair put it on next month’s agenda! The Roth 457(b) discussion is back.

This is a clear example how one person can initiate change. But the effort is not done yet. If you are interested in having the Roth 457b plan available, please attend our next meeting on February 19th from 3-5. You do not have to come at the beginning of the meeting. Public comments don’t start until about 4:30. The committee wants the Roth 457b as bad as the employees. As Larry will point out, its a great addition to our already Award Winning 457(b) plan!

Looking into the Future:  A Case for the Roth 403b/457b*

by Teacher Larry Shoham

Thanks to Steve Schullo, I’ve connected to LAUSD’s Retirement Investment Advisory Committee. Here, I’ve met some great people within LAUSD, UTLA, and with TIAA-CREF, who are committed to providing teachers with non-toxic supplementary retirement options for teachers. I am eager to learn more about the District’s 457(b) plan, which allows one to take distributions at the termination of employment. Unlike a 403b, a person doesn’t have to wait until 59 & 1/2 to take out money.

At our most recent meeting, I made an appeal for LAUSD to provide employees with the option of contributing to a Roth 403b/457b. In a regular Roth IRA, the maximum contribution is 5,500/yr. In a Roth 403b/457b the maximum annual contribution is $17,500. Just like a Roth IRA, a Roth 403b/457b will allow employees to take advantage of tax-free distributions at 59 & 1/2, but unlike a Roth IRA (which has no required distributions, ever), a Roth 403b/457b requires distributions at 70 & 1/2.

Why a Roth? A Roth 403b/457b is funded with your post-tax earnings. Basically, you pay modest taxes on modest earnings now and then reap the benefit of tax-free withdrawals on a substantially larger amount of money later, in retirement.

Let’s think about it: If you are likely to collect a full pension through CalSTRS, the extra money you sock away in your supplemental retirement will be taxed at ordinary income at the time you begin taking withdrawals. This financial windfall (taxed as ordinary income) is likely to put you into a higher tax bracket. A Roth 403b/457b gives you the benefit of tax-free withdrawals, which will hopefully help you maintain a lower your tax bracket in the years you are likely to need this money the most.

Something else to think about, especially if you are younger: Right now, our taxes are relatively low. Most of us teachers would argue that taxes should be higher to fully fund public education as well as services for our students and their families. Our union will continue to push for efforts to increase revenue, such as Prop 30, that raised taxes across the board. Personally, it’s hard for me to imagine a future where taxes are not substantially higher. Even though I like the feeling of contributing $1,450/month into my 403b and only see $987* removed from my paycheck, it’s important to do the math. An interesting picture emerges.

*this number is based on the formula from the California Teachers Association website: http://ctainvest.org/home/calculators/pretax-contribution.aspx

Here are two scenarios, Roth vs non-Roth

Non-Roth:

  • $1,450 compounded annually at 6% over 30 years = $8,328
  • If you are paying 25% federal income tax +9.3% in state tax, you are looking at $2,856 in taxes. The total amount in your pocket after 30 years is $5,471.

Roth:

  • Instead of contributing $1,450, you pay your tax now and contribute a paltry $987.
  • $987 compounded annually at 6% over 30 years = $5,668

You aren’t paying any tax on this money. It’s all yours! Yay!

As you can see from the example above, even if federal and state taxes do not change over the next 30 years, the Roth option is still the winner!

Will taxes in the future be lower than they are right now? Again, this is hard for me to imagine. Maybe if the neo-liberals and Republicans manage to undermine the political influence of public sector unions, they will be able to cut taxes (along with the social services these taxes support). I don’t know, but my gut tells me to pay my taxes now and benefit from Roth savings later!

Shall we hedge our bets? Since we don’t know what will happen with taxes in the future, taking advantage of a regular 403b/457 AND a Roth 403b/457 can provide one with the security of “tax diversification.”

I am worried about newer teachers who have entered to profession after 2013. Because of pension reform efforts in 2012, these teachers are going to have to work longer in order to receive their pension, and their pension will be determined by the average of their last three years rather than their single highest year. The addition of a Roth 403b/457 would benefit our younger members who, in all likelihood, are going to receive less lucrative benefits from CalSTRS.

*For the record, the advisory committee voted for the 457b Roth because it has lower costs than most of the 403(b) insurance annuity products.

6 Comments

  1. I’m 27 and currently a teacher at LAUSD, I have both an IRA and ROTH IRA but never got 457 because of ROTH 457 is not available, how long will it take until this becomes a reality?

  2. Hi Jaime,
    Good morning. I am so happy this issue is starting to cause a stir! You have no idea how rare it is for teachers to start demanding or asking for anything related to the 403(b) or the Award Winning 457(b) plan.

    It will not take very long when enough employees start demanding it. It’s a supply and demand issue. Three things you can do.

    1. Contact Larry Sholam at Hamilton HS. He has connections with UTLA and is organizing an effort to bring the 457b Roth a reality. UTLA could bring this issue to the negotiating table. Talk with Larry.
    2. Do what Larry has already done last month, come to our Retirement Investment Advisory Meeting and tell the committee that you and others want the Roth. And bring people with you. As a result, the Chair put this issue back on the agenda for the February 19th meeting 3-5!

    This meeting is on the 28th floor of the Beaudry building from 3:00-5:00 (I will post a notice on this blog when I get the agenda). The public can speak to the committee at about 4:30, so you don’t have to be there at 3:00. This is not like the Board of Education meeting whereby the members just listen. It’s a back and forth discussion. Most of the committee members comprise of employees like yourself. I am a retired elementary teacher, another member is a literature teacher at Fairfax HS. Sandy is the UTLA rep. Other members represent the other unions. You have peers!

    3. There is a third effort which will take more of your time: speak directly to the Board of Education and write letters to them and the CFO Megan Reilly. The Committee advises Megan, but she has to listen to the board. The 457b Roth has already been passed by the committee over a year ago and it’s not happening because LAUSD tells us that not enough people are asking for it.

    Start asking and keep up the pressure with letters, hook up with Larry, speak to our committee meeting (bring friends) and speak to the Board of Education.

    Let me know what you think of my suggestions. These are things I have done myself over the years and the process for 403(b) and 457(b) change is incremental, at best, but eventually things will change. The fact that we have an Award winning 457(b) plan took years in the making. I am confident that this issue might come to reality sooner rather than later because there is an existing infrastructure for lausd employees to speak directly to policy. But as I said in the beginning. If only you and Larry ask for the Roth, it will be a lot harder for the committee to press the district to offer this fine feature. Spead the word!

    BTW, congratulations for starting your retirement planning so early in your career!
    Have a great week,

    Steve

  3. Hi again Steve, I just talk to the UTLA rep, we are going to discuss what we can do in order to make Teachers aware of this; starting with this school. Thank you for your advice I will start taking all the steps that you recommend. Thank you again Steve!

  4. Hi Jaime, I encourage you to connect with Larry Sholam at roth4lausd@gmail.com. The district is dragging its feet! We will continue to fight for this, but we need more people to tell the district we want the Roth.
    Steve

  5. Hi,
    I realize this thread is from early 2015 but I just got the lausd benefits package for 2017 and in researching came across it. Thank you for the information! Are there currently Roth options available for the 403b & 457b plans? Thank you!

    Devin

    • Hi Devin,
      No, not yet. But connect with Larry Sholam at roth4lausd@gmail.com. He is the self-appointed leader for UTLA about the Roth. But he needs help to get the benefits and payroll departments to offer a Roth. Our advisory committee is in full support of the Roth option, but payroll division says it will take time to implement.

      We think Payroll could do it now, but there aren’t enough people asking for it, so they drag their feet. You know how our district operates, they respond to a crisis. You have some phone calling or emails to LAUSD benefits, and don’t forget each member of the Board of Education.

Trackbacks/Pingbacks

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