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
- $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.
- 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.