“I started saving later for retirement because I was in school pursuing my required advanced degrees; can I make up for lost time on retirement savings?”
This can be a common feeling but you are not alone. According to a recent report, over 60% of U.S adults don’t start retirement savings until after age 30 so many people are in the same boat.
Making up ground on retirement savings is the financial equivalent of trying to get extra credit late in the semester. The effort is well worth pursuing and will help improve the success of your retirement years.
The good news is that there are many ways to catch up on retirement savings for employees who work in higher education and you may have unique options available to you depending on your employer, income, and years of service.
Step 1: Take advantage of the opportunities available to everybody
This is the simplest step, but many employees often don’t know how much they can contribute to their retirement accounts or how much they are contributing currently. It can be confusing because contribution limits continue to increase over time.
- For 2021, the IRS allows up to $19,500 to be tax-deferred through your workplace retirement plan (403b, 457b, 401a, etc.) and another $6,500 for employees over age 50. An additional $6,000 can be contributed to an IRA as well as $1,000 for those over age 50. Income limits and work-related retirement plans will dictate whether the contribution is denoted as deductible, non-deductible or a Roth IRA contribution.
- Right there you have between $19,500 and $33,000 that you may contribute as an individual and this could be doubled for married couples!
- If this amount more than meets your needs then you will want to consider which of the accounts are best to contribute to. Key considerations will be investment choices, advice resources, costs and liquidity considerations as well as tax benefits. For example, you may be able to make Roth contributions through work even though your income precludes making Roth IRA contributions.
For most people, the level of savings noted above will be sufficient for retirement savings. However, I have run across many times where clients wanted additional ways to save especially with tax advantaged accounts but didn’t realize they had additional options available to them.
For example, a client who inherits money may want the ability to add that money to a tax-deferred account. Although they can’t write a check, there may be unique opportunities through work for that client to add substantially to their retirement savings accounts.
Step 2: Identify key characteristics that will determine whether you may have additional savings options at your institution.
- Type of employer you work for: Do you work for a public university system or do you work for a private university?
- Type of Retirement Plan(s) Available to you: There are different catch-up provisions available depending on the type of retirement plan(s) offered at your employer. You will find a nice chart from MissionSquare Retirement that summarizes the limits and highlights additional savings opportunities from 403b and 457b accounts. Some institutions may offer both 403b and 457b accounts.
- Did you have years where you didn’t contribute as much as you could in the past?
Step 3: Look for these savings options based on your answers to the questions above.
Public University Retirement Savings
- Most employee retirement contributions will be limited to the general rules as stated above. However, employees that work for public universities (e.g. University of New Hampshire, University of Massachusetts etc.) are often able to contribute simultaneously to two retirement plans.
- For example, University ABC offers their regular 403b retirement plan which includes employer contributions and employee match. For employees who reach the cap on 403b contributions they allow the employee to open a 457b plan and make voluntary contributions to that plan as well.
- Employees often are allowed to contribute up to $19,500 plus $6,500 to each plan for a total amount deferred of $66,000 between 403b and 457b contributions.
- Having the ability to contribute to both types of accounts offers many strategic options especially around combining pre-tax and post -tax savings.
Private Higher Education Savings Accounts
- For highly compensated employees of private educational institutions, there will often be a 457b deferred compensation retirement plan to allow for additional savings. These plans allow additional savings like the amount allowed in the general retirement plan. However, there are many rules to be aware of especially around limited access to funds, limited (or no) ability to rollover accounts and specific rules around the timing for making decisions on withdrawals. It is imperative to fully understand the provisions of these plans prior to adding savings.
Catch-up contribution options
- Both 403b plans and 457b plans have catch-up opportunities for employees who didn’t contribute as much as they could in the past.
- For employees who are using a 403b plan they may be able to catch-up for years where they didn’t contribute to the plan. This is available only for employees with over 15 years of service per IRS regulations. This contribution is limited to $15,500.
- For employees in a 457b plan they may have the same ability to make up retirement contributions that they didn’t make in prior years. This is only for employees within the last three years of normal retirement age as defined by the IRS. For 2021 the 457b catch-up amount is $19,500.
For those employees who want to accelerate their retirement savings the opportunities are vast especially for those who work in academia. There is a lot of complexity that must be addressed regarding income limits, plan rules and flexibility and serious tax considerations. Each of these factors must be addressed, but the planning opportunities that are available can be very attractive especially as one nears retirement.
After you complete the steps above to identify what savings opportunities might apply to you, contact your human resource department to see the specific rules for you and your institution.
Each employer can design their plan within certain parameters so the options above may or may not be available. You will also want to coordinate your plan with your tax advisor to make sure the options are appropriate for you.