Teacher's Retirement

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Navillus
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Teacher's Retirement

Post by Navillus » Wed Feb 03, 2016 4:58 pm

My wife is preparing to retire from teaching. She has an option to purchase additional service credit. The cost is a single payment of $19,305 and increases her annual benefit by $3,400. Given that she is in good health and the payback is fairly quick, I think we should we should go for it but am open to other opinions.

We can pay for it by writing a check with the funds coming from the Vanguard Money Market fund in our taxable account. The other option is rolling the required amount out of her IRA. I really don't know how to decide which payment method is best and would appreciate input.

The Wizard
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Re: Teacher's Retirement

Post by The Wizard » Wed Feb 03, 2016 5:22 pm

I would buy SEVERAL of those credits if I could!!!

Where the $$ comes from is of less concern, but you need to research tax-sheltered vs taxable funds. Which flavor of $$ do they want?
IOW, if you buy a single credit with $19,305 of after-tax money in your checking account, will the $3400 per year allocable to that purchase be tax-free forever more?
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hnzw rui
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Re: Teacher's Retirement

Post by hnzw rui » Wed Feb 03, 2016 5:48 pm

The Wizard wrote:IOW, if you buy a single credit with $19,305 of after-tax money in your checking account, will the $3400 per year allocable to that purchase be tax-free forever more?

In general, no. You get a cost basis, that's it.

Personally, I'd just use IRA funds for simplicity and to reduce eventual RMDs from the IRA.

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celia
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Re: Teacher's Retirement

Post by celia » Wed Feb 03, 2016 6:38 pm

I would do it in a heartbeat, AND use traditional IRA or 403b money because they are tax-deferred and she will pay taxes on the whole thing each year.

If she pays from your after-tax checking account, a little bit of the pension will be tax free. As soon as those tax-free amounts cumulatively total $19,305, the whole pension will become taxable.

Originally I thought that if DH bought service credit using money from our checking account and it increased his pension by 10%, as an example, I assumed that 10% of his pension (including COLA increases) would always be tax-free. But, no, it doesn't work that way. As soon as you get the same dollar amount back tax-free, the whole thing is taxable. I think it takes 15-20 years to get to that point.

Note that once she starts the money transfer process, it needs to be completed in 60(??) days.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Navillus
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Re: Teacher's Retirement

Post by Navillus » Thu Feb 04, 2016 9:44 am

Thanks All for the helpful input. I now plan to purchase the optional service credit using funds from her IRA. Given the ongoing market volatility, I'm happy to use some invested funds to increase guaranteed (well sort of) income.

Carl53
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Re: Teacher's Retirement

Post by Carl53 » Thu Feb 04, 2016 9:56 am

Sounds like a great deal. You do not mention her age. I wonder if she is under 59.5, would the responses about using IRA money still be the same?

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hand
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Re: Teacher's Retirement

Post by hand » Thu Feb 04, 2016 10:30 am

While this sounds like it is a good deal assuming the pension pays out as promised, it is hard to truly evaluate without understanding the underlying funding and stability of the specific pension plan.

For example, the Michigan Public Schools Employees’ Retirement System (MPSERS) has an unfunded liability of roughly $25 billion.
This underfunding will eventually impact someone be it retired teachers, current teachers, local, state or federal taxpayers or someone else.

Context and the specific plan matter!

hnzw rui
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Re: Teacher's Retirement

Post by hnzw rui » Thu Feb 04, 2016 10:43 am

Carl53 wrote:Sounds like a great deal. You do not mention her age. I wonder if she is under 59.5, would the responses about using IRA money still be the same?

Since it will be a transfer/rollover from IRA to pension plan, there's no penalty or taxes so her age doesn't really matter. She'll just get taxed on the annual pension.

livesoft
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Re: Teacher's Retirement

Post by livesoft » Thu Feb 04, 2016 10:52 am

So if one pays out of the MM fund, then it is like a $19K additional contribution to a retirement plan, though not tax-deductible and does not create future tax-free income like a contribution to a Roth IRA ... unless one is in a very low income tax-bracket. Furthermore, does the pension go away upon death or are there survivor's benefits? And does one really get a "cost basis", so that previously taxed money is not taxed again? How does that work on a tax return?

If it is out of the IRA and is a non-taxable rollover, then it is just moving money around that will eventually be taxed.

If it is out of the IRA and considered a withdrawal, then that's probably not something to do.
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pshonore
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Re: Teacher's Retirement

Post by pshonore » Thu Feb 04, 2016 2:18 pm

livesoft wrote:So if one pays out of the MM fund, then it is like a $19K additional contribution to a retirement plan, though not tax-deductible and does not create future tax-free income like a contribution to a Roth IRA ... unless one is in a very low income tax-bracket. Furthermore, does the pension go away upon death or are there survivor's benefits? And does one really get a "cost basis", so that previously taxed money is not taxed again? How does that work on a tax return?

If it is out of the IRA and is a non-taxable rollover, then it is just moving money around that will eventually be taxed.

If it is out of the IRA and considered a withdrawal, then that's probably not something to do.
Generally after tax employee contributions are "recaptured" over a 20 to 30 year period when you start drawing the pension. Employer are supposed to keep track of that and supply you with the number, but a lot of that stuff falls through the cracks. Pre-tax contributions have only been around for the last 25 years or so. All the details are in IRS Pub 579.

WalterMitty
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Re: Teacher's Retirement

Post by WalterMitty » Thu Feb 04, 2016 2:25 pm

I would love to do this!!!

It's an 18% return annual return....payback in under 6 years....sign me up, no matter where the funds come from.

fourkids
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Re: Teacher's Retirement

Post by fourkids » Thu Feb 04, 2016 4:02 pm

They don't make teachers' pensions like they used to when your wife enrolled.
That is an awesome benefit they are offering.
Take it and run!

Bir48die
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Re: Teacher's Retirement

Post by Bir48die » Thu Feb 04, 2016 4:10 pm

This is a no brainer.

CoachIke
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Re: Teacher's Retirement

Post by CoachIke » Tue Apr 26, 2016 10:39 am

Another excellent thread.

cliff
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Re: Teacher's Retirement

Post by cliff » Tue Apr 26, 2016 2:02 pm

I would certainly do it, but depending on the state far from guaranteed. I have a state pension that had a COLA of 3% per year when I retired. 3 years later state decided they couldn't afford so now no COLA. Over $300,000 of anticipated pension gone if I live to 85.

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runner9
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Re: Teacher's Retirement

Post by runner9 » Tue Apr 26, 2016 2:07 pm

I see from a different thread that you're in IL. I'm not expert, but how guaranteed are teacher pensions in IL? From national news, I'd have my doubts and be very cautious (but I don't really know)

I also see that this thread is nearly three months old, has this already been decided?

corysold
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Re: Teacher's Retirement

Post by corysold » Tue Apr 26, 2016 2:17 pm

runner9 wrote:I see from a different thread that you're in IL. I'm not expert, but how guaranteed are teacher pensions in IL? From national news, I'd have my doubts and be very cautious (but I don't really know)

I also see that this thread is nearly three months old, has this already been decided?


IL teacher pensions are the most guaranteed in the nation. They are written into the state constitution that they cannot be changed or any amount of benefits promised be rescinded.

That is the good news.

The bad news they are only 42% funded, the state never pays their full share and IL is going on month 11 of no budget with a $10 billion backlog in bills.

So what happens when the "guarantee" comes up against "no money" is the big question no one has an answer to.

Navillus
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Re: Teacher's Retirement

Post by Navillus » Tue Apr 26, 2016 9:21 pm

Runner9 - yes we decided to buy the additional benefit. The purchase increased her monthly payment by $283 which feels like a solid decision.

corysold - Thanks much for the guarantee information. I agree that a day of reckoning is coming but the way our politicians behave I also know they will kick it as far into the future as they can.

Thanks to all who responded to my post. Your thoughts and recommendations are appreciated.

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