This ultimate Texas teacher retirement guide will cover the retirement benefits of being a Texas educator. We’ll cover everything from the basics of your pension plan to how to set yourself up for a comfortable retirement.
Texas Teacher Retirement Benefits
As a Texas public school teacher, you have access to unique retirement benefits. However, those benefits you receive differ based on your tenure, your school district, and the year you started teaching. Put simply, understanding what you are entitled to is no simple matter.
Don’t feel disheartened! That’s the reason we’ve created this guide.
We’ll simplify your retirement benefits so you can understand what you are entitled to as a Texas teacher to enable you to make informed decisions.
Retirement Pension
As a Texas teacher, you are automatically enrolled in the Teacher Retirement System of Texas (“TRS”). This is mandatory for most Texas educators, who cannot opt-out of the pension plan. Exceptions include some higher ed adjunct professors and some part-time employees who may not be eligible at all. Otherwise, participation is indeed required!
How much should you contribute? Your pension contributions are automatically set to 7.7% of your salary. This amount will be automatically deducted from your paycheck and no action is required of you.
What Will I Receive In Retirement From My Pension?
Unfortunately, calculating the size of your pension check is a pain in the rear. You’ve got to figure out what tier you are in, your service credit, your retirement age factor then do some averaging of your highest-earning years and multiply it all up. Then you hope you didn’t screw it up!
To make things simple, you can use this calculator to determine your pension inputs.
First and foremost if you do not reach 5 years of service within the Texas school system then this is a moot point. You must reach 5 years of service in order to “vest” in the TRS Texas pension plan.
Vest, in this case, means that you qualify for the pension benefit. Should you leave the Texas public school system before reaching that 5-year mark, you may be able to leave your funds in the pension if you intend to rejoin in the future. If you do not return, your pension contributions will be returned to you.
It’s important that you move those into an Individual Retirement Account (IRA) to avoid paying taxes on any returned pension money. Check out our breakdown of IRA providers to find the right fit for you.
Your tier is primarily determined by the start date of your employment in the Texas public education system.
For example, if you joined the Texas TRS system on or after August 31st, 2014 then you are in Tier 5. Learn more about all 6 tiers in the TRS Benefits Handbook under the “What’s my Tier” section.
403(b)
An additional retirement benefit you are likely entitled to as a Texas teacher is a 403(b) retirement account. A 403(b) account type is similar to a 401(k) plan.
Unlike the TRS pension plan, you must sign-up for the 403(b) yourself. Using the NBS Benefits website, you can filter to your district to determine which 403(b) providers are available to you. This is where every district is different. We recommend using Vanguard or Fidelity if your district works with either of those companies.
From there, you’ll visit the 403(b) providers website to get your account setup and the necessary paperwork to start building your retirement savings.
The 403(b) offers another tax-advantaged method for you to save for retirement. By signing up for a 403(b), you are able to make pre-tax contributions towards your retirement. This means you will not pay tax on that money until you make withdrawals from your 403(b) during retirement.
Action Step
Sign-up for a 403(b) as soon as you can. Even if you are not able to contribute a lot, contributing something towards retirement is better than nothing. Consider signing up for the Acquire Then Retire challenge in the Ostrich app that will help you determine the right contribution amount.
You can use this 403(b) calculator to see how much money will come out of your paycheck at different percentages. You’ll notice that because you are contributing money before taxes your after-tax paycheck drops less than you’d think.
You can learn more about 403(b) accounts in our step-by-step 403(b) guide.
457(b)
A third type of employer-sponsored retirement account you may be eligible for is a 457(b). This is less common than the 403(b) but has very similar functionality. 457(b) plans are only available through state and local governments and some qualifying non-profits. Generally, if you have the choice between 457(b) and a 403(b), you should choose the 403(b) option as it typically is the better choice.
To find out how to setup a 457(b) plan visit the NBS Benefits website and filter by your district to determine which 457(b) or 403(b) providers are available to you.
Roth or Traditional Individual Retirement Account (IRA)
The third retirement benefit you can take advantage of is setting up your own Roth IRA or traditional IRA. These accounts you get to choose which provider you use and you control this no matter what the district, region, or the State of Texas decides about the other retirement programs.
If you are taking advantage of both the 403(b)/457(b) and pension, it is worth setting up an IRA or Roth IRA to really maximize the retirement benefits you receive.
It is important to have your own retirement accounts for several reasons. For example, the union and district could change their rules or the pension fund could run out of money. Or something completely out of your control could mess up your retirement cushion. Having your own retirement account that is separate adds an extra layer of safety to your nest egg.
The current total combined contribution limit for a Roth IRA & Traditional IRA is $6,000 per year. If you’re aged 50 years or older, you can make an additional $1,000 “catch-up contribution” for a total of $7,000. You can confirm this on the IRS website.
Roth IRA
A Roth IRA is a retirement account that you contribute to with after tax dollars. The advantage is that any gains you have are not taxed. This means you pay tax now but your investments grow tax free. Many in the personal finance space recommend using a Roth account because of this.
For a demonstration of the tax advantages of Roth accounts, check out our Retirement Investing Guide.
For the 2022 tax year, Roth IRAs are available to people who make less than $144,000 a year if you are single or $214,000 a year if you are married. You can see the latest requirements for a Roth IRA on the IRS website.
Traditional IRA
A traditional IRA is a retirement account that you contribute to with before tax dollars, and defer paying tax until you withdraw funds in retirement. You lower your tax burden in the immediate term and kick the can down the road for when you withdraw the money. In the meantime, that money can be invested, and grows tax free while in the account.
This functions similarly to your 403(b)/457(b) except you control the account and what investments you choose.
Accessing Your Retirement Money
While it is generally best to avoid accessing your retirement money early, there are times when you may want or need to. There are four ways to access your retirement money: through an early withdrawal (not advised!), a loan, a hardship distribution, or when you reach retirement age!
Early withdrawal
This is the worst way to access your retirement funds early and should be avoided if possible.
If you pull money out of your retirement accounts early you will end up with a hefty tax bill and a 10% penalty for an early withdrawal. This is a very expensive way to access your retirement funds and should be a last resort!
Luckily there are ways to access your retirement money without incurring fees and taxes.
A 403(b) Loan or a 457(b) Loan.
One great way to access funds in your 403(b) or 457(b) before retirement is a loan. What is great about a loan is that while the interest rate is higher, you are the bank! This means you pay interest to yourself versus someone else.
You can loan up to a maximum of $50,000 from your 403(b) or 457(b). The total amount you are allowed to loan yourself is usually around 50% of the total value of the account, but each financial institution has its own requirements. Thus in order to receive a loan of $50,000 you’ll have to have a minimum account value of $100,000.
With a 403(b) or 457(b) loan, you borrow funds from your own personal account. Your account balance is lowered when you receive the loan, and your payments go back to your 403(b) or 457(b) account. Thus making you the bank.
Loan Terms
The interest rate will vary depending on the provider and what the going interest rates are currently. Payments are automatically deducted from your paycheck and typically a service fee applies at origination. There is also an insurance fee tacked onto each payment of 0.1%, in case you pass away before the loan is repaid.
If you leave the Texas Public School system voluntarily or you are terminated you have 30 days to repay the balance of the loan in full. If you do not then it will be deemed as a distribution that will incur a 10% penalty and be taxed as income.
Hardship Distribution
The third way you can tap into your retirement account early is through a hardship distribution. Typically this is used when buying a primary residence and you can prove you have no other alternative.
A hardship distribution still requires you to pay tax on the money you withdraw but the 10% penalty is waived.
This method is not advised if it can be avoided.
You Hit Retirement Age
The last (and best) way to access funds is through retirement! You have to be at least 55 to start receiving pension distributions and 59½ for the 403(b), 457(b), and IRA distributions. Though it is likely you will want to delay accessing those funds right away. Delaying access to the pension results in higher payouts up to a certain age and investments left in your 403(b), 457(b), & IRA can continue to compound.
Use the Pension Plan calculator to determine when to draw down your pension.
If you reach the age of 72 and have yet to access your retirement funds, you will likely be forced to access the money through required minimum distributions (RMD). You can learn more about required minimum distributions here.
Final Thoughts on Retirement as a Texas Teacher
This Ultimate Texas Teacher Retirement Guide will help you, a Texas educator, take advantage of all of the retirement benefits you are afforded. You spend so much time helping students and parents learn and grow. But it is just as important to make sure you are taken care of yourself. Use the TRS Pension, 403(b)/457(b), and individual retirement accounts to set yourself up to live well in the future.
We encourage you to join Ostrich and connect with other teachers who are working towards their financial goals. For more personal finance info, dive into the resources on the Ostrich website, and follow us on Instagram and Twitter!
