Texas Teacher Retirement Planning: How to Supplement Your TRS Pension with a 403(b) Plan

Discover the value a 403(b) plan holds for school employees

Whether you are a seasoned educator or beginning your career serving students, it’s never too late or too early to think about retirement. For Texas teachers and other school employees, a 403(b) retirement plan offers an easy way for you to save for retirement through tax-advantaged investments.

Alas, although 403(b) retirement plans are available to all school district employees, a recent national study found that only 27%¹ of school employees take advantage of these plans. That means almost 73% of school employees may be missing out on the ability to save for a more comfortable retirement.

Let’s take a broad look at how 403(b) plans work so that you can better understand the value they may hold for you.

(Note: Although there are differences between traditional 403(b) and Roth 403(b) retirement plans, we’re speaking generally about them in this article.)

Why a TRS Pension may not cover all your retirement needs

You’ll often hear that you need at least 70-90%² of your income to maintain your current standard of living in retirement. It’s known as the “income replacement ratio” and helps determine if your retirement income is adequate. While the Teacher Retirement System of Texas (TRS) will help, the estimates suggest that the TRS pension benefit will only replace about 69%⁵ of an employee’s pre-retirement income.

So, how might you bridge that gap between your TRS pension and what will it cost to live more comfortably in retirement? That’s exactly how 403(b) plans can be useful.

What is a 403(b) retirement plan?

A 403(b) retirement plan is a tax-deferred retirement savings plan offered to public school employees through their school districts or open-enrollment public charter schools. Your contributions, as well as any investment earnings, grow tax-deferred until the funds are withdrawn from the plan when you retire.

Fortunately, every school district in Texas offers this option to educators, administrators and staff.

How are 403(b) plans similar to 401(k) plans?

You’ve probably heard of 401(k) plans, something that many for-profit businesses offer employees. Both 401(k) and 403(b) plans are employer-sponsored, allowing eligible employees to contribute toward their retirement savings with pre-tax dollars. Because contributions can be made before taxes are calculated on their salary, an employee's taxable income for the year may be reduced.

An advantage 403(b) and 401(k) plans share? Your retirement investments may follow you if/when you change employers. Thus, if you leave the district where you currently work to teach elsewhere, you may be able to leave your retirement accounts where they are or transfer them to a 403(b) plan that your new school district offers (if available).

Annual contribution limits to keep in mind

It’s worth noting that both 403(b) and 401(k) plans have the same annual contribution limits set by the Internal Revenue Service (IRS) (and in keeping with inflation).

For 2023, the 403(b) contribution limit for employees under 50 years old is $22,500. The IRS allows employees who are 50 years or older to add a bit more to their retirement savings (via catch-up contributions), so they may contribute up to $30,000 annually.

Withdrawals from your 403(b) plan are taxed as ordinary income for the calendar year in which they are withdrawn. Withdrawing funds before you reach age 59½ may result in additional financial penalties on top of the required taxes.

A key difference between 401(k) and 403(b) plans

In an employer-sponsored 401(k) plan, investors can choose from mutual funds, exchange-traded funds and sometimes individual securities. 403(b) plans only offer investments in mutual funds and annuities.

While the 403(b) choices might seem somewhat limited compared to a 401(k), studies show that too many choices can make financial decisions like investing more difficult. So having a concentrated number of investment choices might indeed encourage investing by making it easier to decide where to put your money. The earlier you decide where and how to invest, the faster those investments will start working for you and your retirement.

How to choose a mutual fund or an annuity in a 403(b) plan

When deciding on retirement plans, a financial advisor can help you decide what would be appropriate for your individual situation. Still, it’s good to understand that a mutual fund offers investors the ability to pool their money to purchase stock in a variety of companies. The money you invest then will follow the ups and downs of the stock market.

An annuity is usually a contract offered through insurance companies that provides some type of guaranteed income when you retire. Typically, annuities come with higher fees, but they offer a more stable income during retirement.

School employees work long hours. For instance, teachers reportedly work an average of 53.3 hours a week for their students. That type of dedication understandably leaves little time to research retirement options and consider tax implications.

Fortunately, we can help. We’d be honored to discuss your financial and retirement goals as part of an effort to help you sort through your options.

To learn more about retirement planning for Texas school employees, contact the RBFCU Retirement Program today for a no-cost, no-obligation initial consultation by calling 1-833-291-1310, emailing retirement@rbfcu.org or scheduling online.

¹National Tax-Deferred Savings Association Net Staff. (2020, November 19). 403(b) Participation Rates. Retrieved from https://www.ntsa-net.org/news-resources/403b-participation-rates.

²Aon Consulting. (2008, July 3). Replacement Ratio Study: A Measurement Tool for Retirement Planning. Retrieved from https://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf.

³Purcell, Patrick. (2012, August). Income Replacement Ratios in the Health and Retirement Study. Retrieved from https://www.ssa.gov/policy/docs/ssb/v72n3/v72n3p37.html.

⁴Teacher retirement system of Texas. Teachers Retirement System. (n.d.). Retrieved from https://www.trs.texas.gov/Pages/Homepage.aspx.

⁵Teacher Retirement System of Texas. Why Save in a 403(b) Plan? Retrieved from https://www.trs.texas.gov/Pages/403b_active_why_save.aspx.

⁶IRC 403(B) tax-sheltered annuity plans. Internal Revenue Service. (n.d.). Retrieved from https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans.

⁷Internal Revenue Service. (2022, November 7). Retirement Topics – 403(b) Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits.

⁸Internal Revenue Service. (2022, October 26). Retirement Topics – 403(b) Catch-Up Contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions.

⁹Paulus, N. (2022, August 24). Choice Overload: Why Is Less Considered More? MoneyGeek. Retrieved from https://www.moneygeek.com/behavioral-finance/terms/choice-overload/.

¹⁰McCain, A. (2022, December 22). 30 Incredible Teacher Statistics [2022]: Demographics, Salary, and the U.S. Teacher Shortage – Zippia. Zippia. Retrieved from https://www.zippia.com/advice/teacher-statistics/.

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Be sure you understand the potential benefits and risks of a rollover or transfer before implementing. As with any decision that has tax implications, you should consult with your tax adviser prior to implementing a rollover or transfer.

Tax-deferred earnings and contributions are not taxed until withdrawn. Amounts withdrawn prior to age 59 ½ may also be subject to a 10% early withdrawal penalty.

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