A retirement system is a network of pension plans that states use to help public employees save for retirement. Each state has at least one retirement system and an organization that administers the program. The systems vary greatly from state to state both in terms of size and number. In Hawaii, there is one system: the Employees’ Retirement System (ERS). The ERS has a Board of Trustees governing it. Read on to learn more about how this plan works. (And should you want more guidance in your own planning, SmartAsset’s free financial advisor matching tool can pair you with a knowledegable advisor in your area.)
How the Retirement System Works in Hawaii
The ERS in Hawaii is a defined contribution plan. This simply means that employees contribute a certain amount of their salaries to the plan. These contributions go into an account that the ERS Board of Trustees manages. It invests the contributions with the idea that they will grow to reach a value where there is enough for members (public employees who pay into the plan) to receive monthly benefits in retirement. Contributions to the ERS grow tax deferred. Members only pay income tax on the money when they receive it as a retirement benefit or when they withdraw contributions from the system.
Overview of Hawaii’s Retirement System
The ERS is the only retirement system in Hawaii. All public employees who work at least 20 hours per week and have a job that is at least 90 days long can qualify for the ERS. Employees who qualify must become members and they must contribute to the plan.
How much you contribute will depend on when you became a member and your occupation. For most employees, the contribution rates are the same. If you joined the ERS after June 30, 2012, you will contribute 9.8% of your salary. If you joined prior to July 1, 2012, your contribution is 7.8% of your salary.
Employees in certain special occupations will contribute more. This includes police officers, firefighters, county prosecuting attorney investigators, water safety officers, adult corrections officers and certain other public safety officers. For people in these occupations, the contribution amount is 14.2% of your salary if you joined the ERS after June 30, 2012. Those who joined prior to July 1, 2012 will pay 12.2% of their salary.
To keep track of who exactly is contributing, the ERS breaks down into three plans. Being part of a plan does not change your contribution level the way your occupation does. These plans mostly signal whether or not you’re contributing to the ERS. The table below describes the three plans.
– Retirement contributions are deducted, pre-tax, from gross monthly salary. – Opportunity for members to “earn back” credited work months for the time between ERS-qualifying positions
|ERS Member Plans|
|Plan Title||Eligible Employees|
|Contributory Plan||– Includes all members who have worked for the state or county continuously since becoming an ERS member. |
– Retirement contributions are deducted, pre-tax, from gross monthly salary.
|Hybrid Plan||– Includes members who left an ERS-qualifying position and then returned to one within four years from the date they left.|
|Noncontributory Plan||– Includes members who are not currently working in an ERS-qualifying position but has in the past|
When it comes to retirement, you only receive benefits (pension payments) if you are a vested member of the ERS. If you are vested, it means that you have been an ERS member for long enough to meet the state’s minimum requirements.
The ERS minimums for vesting depend on your age, when you joined the ERS and your years of service. For members who joined after June 30, 2012, you cannot retire with benefits until you have 10 years of service. (Ten years of service makes you a vested member.) If you have at least 25 years of service, you qualify to retire early, at age 55, without paying any penalties.
Members who joined the ERS on or before June 30, 2012, cannot retire with benefits until they have five years of service and are at least 55 years old. Though if you at least 25 years of service, you are eligible to retire at any age.
When calculating your years of service, one month of creditable service is a month in which you worked at least 15 days (14 days for February).
Retirement Taxes in Hawaii
Contributions that you make to the retirement systems are tax-deferred. That means you don’t pay taxes on the money until you withdraw it or receive it as distributions in retirement. However, you do eventually need to pay federal income tax on that money. There are a couple of ways that you can pay that tax. The easiest option is to allow the IRS to withhold taxes. This frees you up from calculating your exact tax liability but may result in you getting a tax refund during tax season.
You can withhold the exact amount of your tax liability by making estimated tax payments. These are quarterly tax payments that you make using your expected income for the year.
Another way to gain control over your retirement funds is to rollover pension funds into another retirement account. If you go with this option, make sure to use another tax-deferred account, such as a 401(k) or individual retirement account (IRA). A Roth IRA is not tax-deferred. It takes money that you already paid income taxes on. The result of rolling into a Roth IRA is that you will need to make an immediate tax payment.
Hawaii does not collect income tax on pensions or benefits from the state’s retirement system. It also doesn’t tax Social Security benefits. However, all other forms of retirement income are subject to the standard income tax rates. Learn more about retiring in The Aloha State with this guide to Hawaii retirement taxes.
Current Financial Health of the Hawaii Retirement System
According to the most recent data, the ERS of Hawaii has about 150,000 members and paid out more than $1.2 billion in retirement benefits during the 2017 fiscal year. Hawaii’s retirement system has had difficulty in the past with funding its benefits, but appears to be in a good position as of late.
Tips to Help Your Retirement Planning
- Help yourself save and plan for retirement by knowing whether or not you’re on track to meet your goals. You can do that with our free retirement calculator.
- Unsure exactly what your retirement goals are? Having clear goals will help you understand what exactly you need to do so that you retire happily. If you don’t have goals or just want a second opinion, 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.
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