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Alabama retirement system

A retirement system is an organization that helps government workers save for retirement. It then helps distribute the money, in the form of a pension, to retirees. Each state has a retirement system, but they vary in size and complexity. The organization that runs the systems in Alabama is called the Retirement Systems of Alabama. According to a 2017 report, there are more than 300,000 people participating in the state’s retirement plans and they earned about $3 billion worth of benefits in 2017. Read on to learn more about the ins and outs of the Alabama retirement system. And if you want hands-on guidance in your own planning, check out SmartAsset’s free matching tool to pair up with a financial advisor. 

Types of Retirement Systems in Alabama

There are three main retirement systems in Alabama. Each is a defined contribution plan, which means that employees contribute a certain percentage of each paycheck to the account. The money grows tax deferred and once you retire, you will receive a set benefit each month. Alabama’s retirement plans qualify as a 401(a) plan.

Each plan is available to different types of employees, depending on your profession. Many full-time, regular, public employees are eligible for the Employees’ Retirement System (ERS). If you are eligible, you must participate in the system. The other two systems apply specifically to teachers and judicial employees.

You can see which employees are eligible for each plan in the table below:

Alabama Retirement Systems
Plan Title Eligible Employees
Employees’ Retirement System (ERS) – Covers most public employees, including law enforcement officials, and some elected officials
– Tier 1 members joined plan before January 1, 2013. Tier 2 members joined on or after January 1, 2013
Teachers’ Retirement System (TRS) – Public teachers
– Tier 1 members joined plan before January 1, 2013. Tier 2 members joined on or after January 1, 2013
Judicial Retirement Fund (JRF) – Justices, judges, circuit clerks and district
attorneys

Overview of Alabama’s Retirement Systems

Alabama retirement system

Employees’ Retirement System (ERS) – This plan is available for the majority of public employees in Alabama. Certain officials also qualify for the system.

The official qualification for the ERS is that you work on a non-temporary basis for at least 20 hours per week. In addition, you earn at least the minimum wage. Temporary employees who have a specific termination date for their job do not qualify. The only exception is if your temporary position is more than a year long. You have to opt into the ERS at the beginning of your second year of temporary work.

All members of this retirement system need to contribute a certain percentage of their salary to the system. The amount you contribute depends on your exact position and how long you’ve been a member of the ERS. There are two tiers of members. Tier 1 members joined the state’s retirement systems (ERS or another system) before January 1, 2013. Tier 2 members joined the ERS on or after January 1, 2013.

For Tier 1 members, the contribution amount for regular state employees is 7.5% of your compensation. The percentage is higher, at 8.5%, for full-time, certified, state firefighters, correctional officers and law enforcement officers.

Tier 2 members contribute to the system at lower levels. The contribution level is 6% of compensation for regular state and local employees. Full-time, certified, state and local firefighters, correctional officers and law enforcement officers contribute at a level of 7%.

You can only qualify for the lifetime retirement benefits when you reach vested status.  Vesting simply means that you have worked long enough as a part of the system to receive benefits. The minimum for vesting is 10 years’ worth of creditable service. This translates to the equivalent of 10 years of full-time work as part of the ERS.

If you have at least 10 years of creditable service and are at least age 60, you can begin to receive the lifetime retirement benefits. You can also begin to receive benefits at any age if you have 25 or more years of creditable service. You will receive your benefits monthly for your lifetime. In some cases, your beneficiaries can receive your benefits after your death.

The ERS determines the exact amount of your retirement benefit using a formula:

Maximum Monthly Benefit = Average Final Salary x Years of Creditable Service x Benefit Factor ÷ 12

The average final salary is the average of the highest three annual salaries that you earned within your final 10 years of work. Partial years count for this calculation.

The number of years of creditable service you have includes partial years. For example, 20 years and six months of creditable service would equal 20.5 years of service for the sake of the formula above.

The benefit factor is 2.0125% for most employees and 2.875% for state police.

Teachers’ Retirement System (TRS) – This system works the same as the ERS in most ways. For example, there are two tiers for members. And the retirement benefit formula is the same. The major difference is that the TRS is specifically for public school teachers.

Members of the TRS also have access to a health insurance plan called the Public Education Employees’ Health Insurance Plan (PEEHIP). This plan is available for full-time employees who work in a public education institution. Enrollment in this plan is not a requirement. Still, it can certainly help members to lower their medical costs.

Judicial Retirement Fund (JRF) – All justices, judges, circuit clerks and district attorneys must become members of the JRF if they were elected or appointed on or later than November 8, 2016. Members contribute 8.5% of their compensation to the JRF.

How you calculate your retirement benefit will depend on your exact position. For city clerks and district attorneys, you can calculate your maximum retirement benefit with the following equation.

Maximum Monthly Benefit = Average Final Salary x Years of Service x 3% ÷ 12

Note that your maximum benefit cannot exceed 80% of your final average salary. Partial years also count toward your years of service (e.g. six months would be 0.5 years).

Justices and judges earn slightly larger benefits. In the equation above, simply replace 3% with 4% when you calculate your benefit. Note that your maximum benefit cannot exceed 75% of your average salary. If you have accrued 18 years of creditable service in the JRF as a judge or clerk, your retirement benefit is equal to 75% of your average final salary.

Retirement Taxes in Alabama

Federal

The contributions you make to the retirement systems are tax-deferred. You do not pay taxes on that money until you receive them as distributions in retirement. There are a couple of ways that you can pay those taxes. The simplest option is to allow the IRS to withhold taxes. This could mean that during tax season you receive a tax refund the same as during your career.

If you want more control over exactly how much the IRS withholds (or if you cannot elect for the IRS to automatically withhold taxes), you can make estimated tax payments. These are tax payments that you make each quarter based on your expected income for the year.

Another way to gain control over your retirement funds is to rollover the public retirement funds into another retirement account, such as a 401(k) or an individual retirement account (IRA). This will normally allow you to maintain the tax-deferred status of your savings while putting them in an account that you have more direct control over. Keep in mind that a Roth IRA is not a tax-deferred account. It takes money that you have already paid taxes on. So with a Roth IRA, you will need to make an immediate income tax payment.

State

Alabama does not charge income tax on pensions or money from any of the Alabama retirement system accounts. The state taxes income from other retirement accounts as regular income. That means you will pay the state’s regular income tax rates, which range from 2% to 5%.

You can learn more about retiring in the state with this guide to Alabama retirement taxes.

Current Financial Health of the Alabama Retirement System

Alabama retirement system

As of the most recent data, for 2017, more than 350,000 public employees are a part of the Alabama retirement system. It also paid out about $3 billion in benefits. Both of those numbers increased from 2016. (They also increased from 2015 to 2016.) Historically, the Retirement Systems of Alabama, has done well to maintain funds that cover all of the benefits that retirees have earned.

Tips to Help Your Retirement Planning

  • One way to maximize success as you save for retirement is to have clear goals. For example, figuring out roughly how much you will need in retirement will help you understand out how much you need to save each year or from each paycheck. If you aren’t sure of your goals, consider working with a financial advisor. An advisor is an expert who can look at your whole financial situation with you and then help you make the best decisions. SmartAsset’s financial advisor matching tool can save you time by quickly pairing you with as many as three advisors in your area.
  • If you have a rough idea of how much you’ll need to save for retirement, you may want to check that you’re staying on track. You can do so with our free retirement calculator.
  • While you’re thinking about retirement, take the time to read up on the Alabama estate tax laws.

Photo credit: ©iStock.com/jacoblund, ©iStock.com/Sean Pavone, ©iStock.com/gradyreese

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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