By Alicia “Dallas” Gutierrez
Multistate Financial Educator & Co-Founder of CTW
Teachers are a precious commodity and play a major role in our students’ education. They spend a good amount of time acquiring the education and certifications to teach and to be able provide lessons in the classroom. The teachers then have to rely on finding a school to use their skills to find a place to impact students.
When they find a school to teach from, if new to the school, they must wait 60 days before starting contributions to TRS (Teachers Retirement System). TRS is the main plan for teachers to contribute to their future retirement. The next retirement option is typically presented by outside representatives that are allowed to present to the schools or may also be presented as online added benefits. One of the other options the teachers have to help increase their retirement is called a 403(b). The 403(b), is also known as a TSA or Tax-Sheltered Annuity Plan. Similar to 401K plans, the 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is not subject to federal or state income tax until it is distributed.
Here are some pros and cons our teachers should be aware of before making their decision:
➔ Flexibility in contributions
➔ Investment options are limited to those chosen by the employer ➔ May have high administrative costs
➔ Optional loans and hardship distributions adds flexibility for employees
➔ In-service withdrawals, that are subject to possible 10% penalty if under age 59 ½
TSA plans are utilized by public schools and employees of cooperative hospital service organizations.
Some concerns I have for our teachers is not having all their retirement options fully explained and/or offered. I have found that in working with retiring teachers, they wish they knew more about all their choices much earlier in their careers. One very typical mistake that teachers have made is relying on the school to provide life insurance during their employment. The insurance they are provided is typically 1-2 times their annual salary. The insurance provided by the schools is only in place during the time of their employment.
When they retire, the life insurance goes away and many teachers have found themselves without the protection on their lives they once had. They are older and may have health issues that may drive up the cost. In some cases, more serious health issues make them uninsurable. No one should find themselves in this situation of the financial burden of a final expense; if not planned for, it will be left to
family (and in many cases the children). This could easily be avoided if the teachers choose to purchase a life insurance policy independent of the school. Also, if the teachers purchased a policy early in their career, the cost would be low and provide proper coverage for any growing family.
My recommendation is that teachers have a policy outside of the school that they control and purchase to fully protect their family. Most school policies do not consider teachers having an increased need for protection, such as having children or getting married or becoming a homeowner. The policies provided would not allow enough financial means in case of a loss of one’s income. A policy that makes a difference is one that is able to provide for an individual or family to maintain a normal life for 6-10 years. This is important to help the family maintain a somewhat normal life, because once there has been a death, life insurance helps to keep the family intact and the death benefit provides for the family, as it provides for the loss of an income.
I will tie in the importance of life insurance once I further explain what teachers need to know when they choose to add a 403(b) alongside their TRS plan. They both fall into the TAX LATER category, which means they pay taxes on both plans upon disbursement of funds in retirement.
What if they were provided another option that could be used to supplement their retirement and provide life insurance protection? There is such a policy that not only protects their life, but provides living benefits. These benefits could help in case of chronic, critical and terminal illness. In some recent cases, it has even helped families that had Covid 19 and they were hospitalized. They were able to receive a portion of the death benefit while they were still living. It helped a number of families with medical expenses, keeping mortgages current and putting food on the table.
More importantly can even be a source of savings, similar to building equity in a home. The biggest bonus of this plan is the funds grow and are not ever at risk with market loss. The funds are not tied to the stock market unlike your other options. The most appealing is the funds are completely available TAX FREE for any needs by the owner of the policy.
We have hard working educators that are making choices based on what they are provided, instead they should be given all their options and have full explanations. This would allow them to make the best decisions for their futures.
