If your employer provides a pension, be happy. A pension provides a powerful retirement tool in your arsenal. The jovial folks at the Department of Labor and National Association of State Retirement Administrators estimate 85 percent of state and local government employees participate in a defined benefit pension. I’m looking at you, public school clinicians. If you work at a federally operated hospital (like a Veterans Affairs facility) or institution, this applies to you, too. Even many nongovernment-operated hospitals offer pensions.
Here’s the thing: As awesome as pensions are, they’ll likely not cover your ideal vision of those glorious post-work years! A great way to close the gap is by saving with a Roth IRA.
Personal finance always includes some caveats, so before we go over why a Roth IRA offers an excellent retirement income supplement, let’s knock out those stipulations. Each person’s situation is unique and there may be times when the immediate tax deduction of a traditional IRA works better (see the differences between the two types of IRAs in the chart). If your employer provides a 401k or 403b with matching funds, your priority should be contributing enough to get the full match amount. Not getting your full match is like turning down free double meat at Chipotle; it just makes no sense! Lastly, if your income is too high, you may not qualify to contribute to a Roth IRA, but more 401k/403b providers are offering Roth options for this scenario.
Returning to our regularly scheduled programming, the two main benefits to pairing a pension with a Roth retirement account involve flexibility and increased retirement income.
More retirement income?! How so? Aside from the obvious fact of saving money in addition to your pension, once you retire, you’ll receive a mix of both taxable and tax-free income.
Both clinicians in the graph (left) get the exact same pension. Clinician A put extra savings into a Roth retirement account, but Clinician B used a traditional retirement account. Both contributed the exact same amounts of money and received the same returns on their savings. Their retirement accounts contain the same balance. At retirement, however, Clinician A can spend $6,500 more a year. Why? Clinician A receives tax-free Roth distributions, while Clinician B must pay the taxman a 25-percent cut.
Saving to a Roth IRA also allows more financial flexibility both before and during retirement. You become the boss! You get complete control of how to invest your money. You can also make early withdrawals easily and at any time. If you withdraw early for an emergency, those withdrawals are subject to penalties and taxes only if they include gains. There are even times when you can make withdrawals free of penalties.
In addition, you can pass Roth IRA assets on to others. Alternatively, if any money remains in your Roth account at your passing, it can go to whomever you want—kids, charities, your dog. Many pension payments stop at the death of you or your spouse.
You can also still make a Roth contribution for 2016 up until the day you file taxes and any major financial institution or financial advisor can easily help establish one. If you want to explore making Roth contributions to your 401k or 403b, check out your account. Most providers let you change your contribution preferences online. If not, make a call to your HR team.
Jacob W. Parish, a CERTIFIED FINANCIAL PLANNER™ professional, focuses on helping audiologists, SLPs and other young healthcare professionals navigate financial planning issues. Visit his website, Schooner NextGen or email at firstname.lastname@example.org. Securities and Advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC