403(b) Story: Teachers Need to Catch Up with Their 403(b) Plans
by Tony Isola, CFP
Unknown to many, teacher 403(b) plans have a special catch up provision that can give a rocket boost to those who arrived at the savings game during the second half of their careers. Called the Long Service Catch-up or the 15-Year Rule, this provision allows teachers with 15 years of service with their current employer an opportunity to make an additional contribution to their 403(b).
This is unique to 403(b) plans and can be invaluable to teachers who have neglected their savings due to the cost of their children’s college and other family obligations. This provision may be especially appealing to empty nesters who might now have additional funds available to put away for retirement.
Sock Away an Additional $15,000
Employees with 15 years of service with their current employer and an annual average contribution of less than $5,000 per year are eligible to contribute an additional $3,000 per year up to a lifetime maximum catch up of $15,000.
Let’s say Emma is a 45-year-old teacher who has worked for 15 years at the same school district. In addition to the $18,000 in regular 403(b) contributions (for year 2017), Emma can add another $3,000 for a total of $21,000 in yearly contributions no matter what her age. She can do this for five years until she reaches the maximum catch-up level of $15,000.
To qualify, a teacher must pass this test: Multiply the number of service years x $5000. If the teacher has contributed less than $75,000 to his/her 403(b) during the last 15 years (5,000 x 15), s/he would fully qualify for this additional catch up.
Plus Age 50 Catch Up
When "Emma" turns 50 she can save an additional $6,000 (year 2017) on top of the 15-Year-Rule through the Age 50 Catch Up provision. Note: For participants eligible for both the Age 50 Catch Up and the 15-Year Rule, the IRS will apply contributions above the regular limit first to the 15-Year Rule. Employers are not required to make this provision available. Read more from the IRS.
Teachers who are really ambitious and also have a 457(b) plan available, can contribute an additional $18,000 in regular contributions (for year 2017) on top of the 403(b) contribution! The 457(b) also has an Age 50 Catch Up provision permitting another $6,000 (for year 2017) contribution. Learn more about the 457(b) here.
Michael Kitces on the Empty Nest Transition
According to Michael Kitces excellent article, Why The Empty Nest Transition Is Crucial For Retirement Success: For instance, a couple earning $100,000 that reaches the empty nest phase (and their peak earnings years!) in their early 50s and still has 15 years left for retirement can accumulate over $1,000,000 of retirement savings by “just” saving 30% of their income and investing for growth (an 8% growth rate). While there’s some retirement date risk that market returns may not align perfectly, that’s still a remarkable “catch-up” in retirement savings for someone who might have hit the empty nest phase with $0 in their retirement accounts! And if they had anything more than $0 of retirement savings as they transitioned to the empty nest phase, the outcome would just be even better!
Hope for Late Savers
While these astronomical savings amounts are out of reach for most, these figures provide a benchmark for the super ambitious. The unique structure of the 403(b) plan provides a second chance for anyone who is willing to make the needed sacrifice.
Often too many people give up if they have little savings after several years of teaching. They are often told they can never catch up since they did not begin their 403(b) plans at the outset of their careers. This is completely false. Today is the first day of the rest of your savings life. Make every second count. Haven’t you wasted enough time and money already? It's time to "catch up."