Yellowstone Financial, Inc.

Public and Nonprofit Employees Can Supercharge Their Savings

Most people don’t join the public or nonprofit sectors because it’s lucrative.  They are there to improve the world around them.  One less known benefit is that they usually can save much more of their income on a tax-advantaged basis than those in private industry.  If through a combination of higher earnings and frugality you can live on far less than you earn, check out these retirement plans.

Tax Sheltered Annuities, also known as 403(b) plans, should not be confused with those sold by insurance agents.  Instead they are similar to 401(k) plans.  They allow you to save up to $19,000 of your income per year for 2019, with an additional $6,000 allotted for those employees aged 50 and over.  Like 401(k)s, they can permit both pre-tax as well as tax-free Roth contributions.

These are the most common non-profit and public sector retirement plans.  Boulder Community Health, Boulder Valley School District, and the University of Colorado all offer 403(b) plans.  The latter two institutions also offer 401(k) plans, as do the City of Boulder and Boulder County.  Federal government employees have access to something similar in the form of the excellent Thrift Savings Plan.  You can’t max out employee contributions for both a 401(k) and a 403(b); you’re bound by the same $19,000 limit shared between those plans.  If your employer offers both a 401(k) and 403(b), look at the plan that offers the best investment choices at the lowest cost.

Defined Benefit Pension.  Rare in the non-profit world at this point, most local public sector jobs have a traditional defined benefit pension.  Typically defined benefit pensions will pay in retirement a percentage of your average annual earnings, with the amount increasing as you age and gain service credit.  Well known is PERA for employees of BVSD, certain employees at CU, the cities of Boulder and Longmont, and Boulder County.   Federal employees may be eligible for the Civil Service Retirement System (‘CSRS’) or the Federal Employees Retirement System (‘FERS’), which is less generous.

457 Plans.  Not well known, 457 plans give employees the chance to save money even after they have maxed out their 401(k) and 403(b) contributions.  Boulder County, Boulder and Longmont, CU, and BVSD all offer the PERA 457 plan.  Just like the 401(k) and 403(b) plans, you have the option for a traditional or  Roth contributions.  It has very similar limits to the tax-sheltered annuities mentioned above, namely $19,000 for those under 50 and $25,000 for those who are older.

The public sector plans enable retiring employees to take penalty-free distributions regardless of the employee’s age.  This can be a boon to early retirees, who deal with age limits when taking distributions from other retirement plans.

Non-profit 457 plans are not as compelling because the assets have a lower level of protection against the claims of the employer.  In the unlikely event that your employer goes belly up, your retirement assets could be at risk.  Also non-profit 457 plans may only cover highly compensated employees and have more restrictions on withdrawal than their public sector counterparts.  If you leave that employer before retirement, you may face restrictions on moving the funds to another plan.

Money purchase plans.  Often known as 401(a) plans, money purchase plans usually involve a mandatory contribution by the employer and the employee into a retirement plan.  Typical of this type of plan is the CU 401(a) plan for eligible faculty and university staff.  Every year CU puts 10 percent of eligible employees’ pay into the plan, while employees make a mandatory contribution of 5 percent of pay.  I’ve seen CU employees amass impressive retirement plan balances because they’ve been putting aside 15 percent of pay year after year.  Incredibly, participation in a 401(a) does not affect your eligibility for other retirement plans such as the 401(k) and 457 plans.

Pulling it all together.  Let’s consider the case of a CU employee Mary in their 40s earning $100,000 a year.  The 401(a) program puts aside 15 percent of pay for a total of $15,000.  Mary can also fund a 401(k) up to $19,000 a year, plus an additional $19,000 into a 457 plan.  With $100,000 salary, Mary could potentially put aside a total of $53,000 in tax-advantaged savings.   Public and non-profit sector jobs often don’t pay as much as corporate ones.  But those who can save a significant amount of pay have access to many option options to fund their financial independence.