What are the benefits of a portable 401k, you ask? First, it’s portable. In today’s workplace, the median U.S. worker has less than 5 years at their current job. Teachers are no exception to this. With so much mobility in our careers, having a retirement system that you can transfer from one job to another is very beneficial. Most portable 401K programs will even suspend your investments if the time between positions is longer than normal.
A second benefit of most 401K programs is a decreased vesting period. Most state pensions require a 10-year vesting period in order to see any benefit. When you consider that most teachers, like many other professions, don’t stay in their current jobs past 5 years, there is little to no benefit to the majority of teachers sacrificing salary now for this benefit later. Portable 401K programs deliver tangible benefits to all participants no matter the stage of your career or length of your service.
Another benefit is how 401(k) plans relate to taxes. The contributions you make from your income to a 401K are exempt from current federal income tax, so it lowers your taxable income while you pay in. Earnings that accrue are tax deferred while you are contributing to your 401K. That means the dividends and capital gains earned inside your 401(k) are not subject to taxes until you begin withdrawing from the plan. Once you retire and start making withdrawals, you’ll likely be in a lower tax bracket. At retirement, you are forced to count every penny of your monthly pension income when figuring taxes. With a 401(k), you can delay withdrawals, or only take out a portion of your investments in order to keep more of your money tax deferred. Play it right and you might even be able to convert some of your pre-tax income to post-tax via a Roth conversion without ever paying any taxes on that money. You will want to discuss this more with a financial advisor.
Probably the greatest benefit of a portable 401k is that you are in control. As the investor, you are empowered to choose how to manage your investment funds. You can determine how much to contribute each paycheck (up to the federal limit). If you change jobs, you have choices as to how you handle your 401K investments. Plus, as a professional educator, you can better evaluate compensation packages when looking at new job offers. You are able compare matching funds and vesting schedules to find the most attractive offer for you.
Teachers and educators alike deserve to be treated and paid as professionals, and your retirement options are included in this. What benefits of a 401k-retirement package do you see in the education sector?