CalSTRS Pension2 – Account Types

Updated : Oct 23, 2019 in Articles

CalSTRS Pension2 – Account Types


Hi I’m Rachel, an employee here at
CalSTRS. Now that you’ve watched Part 1 of this series and have a better
understanding of what Pension2 is and why it’s an integral part of the CalSTRS
hybrid Retirement System, it’s important to understand the differences between
the four supplemental savings plans. A 403 (b), a Roth 403(b), a 457(b) and a Roth 457(b)
plan. The investment options within each plan are the same, what differs is how
each one functions in your unique situation. In a 403(b) plan your
contributions are tax-deferred. That means the amount of money you choose to
contribute to the plan comes out of your paycheck on a pre-tax basis – before taxes
have been taken out. This will also reduce your taxable income every year
come tax time and potentially put you in a lower tax bracket. In addition to your
contributions, your 403(b) earnings are also tax-deferred, which means you don’t
pay any taxes on your earnings during the year. So how do you tax-deferred
plans work? Remember, the amount you contribute to the plan each month is
taken from your paycheck before taxes have been taken out. Let’s look at an
example. If you were paid $100 after taxes, your take-home pay would be about $75. Assuming a 25 percent Federal income
tax rate. However if you choose to contribute $100 to your Pension2 403(b)
account, the full $100 would go into the account. Therefore, you would
have saved yourself $25 and you would have more money on which to earn
interest. So it’s kind of like a double savings. Only when you withdraw the money do you pay taxes. The Pension2 457 plan is similar to its traditional 403(b)
counterpart in that contributions are made on a pre-tax basis. The difference
between the two comes into play when you attempt to access your funds. A 457 plan
allows you penalty-free access to your account as soon as you separate from
your employer, regardless of your age. A 403(b) plan requires you to reach age 59 1/2 before taking penalty free distributions.
Keep in mind you cannot take withdrawals from your 457 plan until you’re
separated from your employer or age 70 1/2, whereas in a 403(b) plan
you’re eligible to take withdrawals at 59 1/2, even if you’re still
working for the same employer. With a Roth 403(b) or 457(b), all of your
contributions are made on a post tax basis. Since taxes are already deducted,
the funds you contribute to the plan will not be taxed when you access them
in retirement. This also means that any returns you make on these invested funds
will not be taxed. Deciding when to pay the taxes on supplemental saving plans
is important. You should consult a tax professional to determine the best
option for your situation. You’re eligible to participate in a 403(b) and a
457 plan simultaneously, but your employer would
have to make each plan available for you to participate. It’s important to
remember that not all plans are available in all school districts. You
must also ensure that Pension2 is an approved vendor in your district before
enrolling. If you have additional questions about any of these plans, visit
Pension2.com, or call the CalSTRS Pension2 hotline. Okay,
ready to take the next step? Watch Part 3 of this series to learn how to enroll in
Pension2.

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