Texas believes all residents should have the “three-legged stool” of retirement income. This trio consists of Social Security benefits, personal retirement savings and state retirement. The Texas retirement system is fairly straightforward for public employees, so you should be able to differentiate between which plan you should belong to. But if you still feel like you’d prefer the help of a financial advisor, the SmartAsset SmartAdvisor tool can match you with advisors in your area.
Types of Retirement Systems in Texas
Like many states with successful pension funds, Texas’ retirement systems are condensed and inclusive. In theory, that helps them stay financially afloat because of the influx of active members paying into the fund. While these retirement systems heavily affect the type of benefits and distributions you’ll receive in retirement, there’s more that goes into the equation. Each of the systems listed below includes a set of stipulations that help clarify exactly what you’re due. These are most notably the age you retire at and how much service time you accrued.
|Texas Retirement Systems|
|Plan Title||Eligible Employees|
|State of Texas Retirement||– Employees, district attorneys and elected state officials at Texas state agencies |
– Certified peace officers in the Law Enforcement & Custodial Officers Supplemental Retirement Fund (LECOSRF)
– Judges in Judicial Retirement System 1 or 2
|Texa$aver 401(k) / 457 Program||– Those hired by a state entity on or after 9/1/2008 are automatically enrolled |
– Anyone hired by a state agency before that can open an account whenever
|Teacher Retirement System (TRS)||– Teachers employed for at least 20 hours/week and 4.5 months/school year at a single public education institute |
– Applies from K-12 to higher education state institutes
|Optional Retirement Program (ORP)||– Same requirements as TRS, but only for teachers at higher education state institutes|
Overview of Texas’ Retirement Systems
State of Texas Retirement – As the standard retirement program for Texas, this system is a defined benefit retirement plan that typically provides monthly distributions for retirees. What you actually receive depends on how long you were an employee, when you were hired and what you were paid. For many, this plan is required by the state government.
Texa$aver 401(k) / 457 Program – The Texa$aver 401(k) / 457 Program allows participants to help their own retirement savings grow. It offers the chance to open your own 401(k) or 457 retirement account. The program even provides a website to track your account 24/7 and a financial advisor service if you’re in need of some help.
Teacher Retirement System – This defined benefit plan comes complete with service and disability perks, death and survivor benefits and TRS-ActiveCare, a health benefit system that is available for certain employees. If you’re not eligible for this, though, the TRS also includes a separate health benefit trust.
Optional Retirement Program – The Texas Higher Education Coordinating Board (THECB) created the ORP to provide an alternative plan for those who would usually enter the TRS. You only have a 90-day window from the day you’re hired to select this plan, though, and once you decide to join, you cannot back out. Rather than have the TRS select how your retirement money is invested, the ORP affords you the ability to invest it yourself. But like a normal 401(k) plan, your employer will match your contributions.
Retirement Taxes in Texas
Even if it isn’t included at first, the federal income tax is nearly impossible to escape. The same rule applies to retirement and pension plans, although it’s a bit delayed. This is because the income tax is deferred until you start receiving payments from your pension. You can counteract this, though, by executing a rollover from your pension plan directly to an alternative retirement account. But Uncle Sam will catch up eventually, as once you pull money from the second account, it incurs income tax.
You can choose to pay your federal income tax through two similar, but separate, avenues: via withholding or estimated tax payments. Whereas most retirees will likely recognize withholding from their former paychecks, estimated taxes might be new. These essentially require you come up with what you expect to owe in taxes and pay it quarterly. Withholding, on the other hand, takes care of everything for you and will consist of a refund or bill at the end of the tax year, depending on if you owe or were overdrawn.
Roth IRAs are post-tax accounts, so if you rollover to a Roth, your circumstances will be different. For this, you’ll have to pay all federal taxes at the time of the rollover with most future distributions being tax-free.
Just seven states in the U.S. don’t have an income tax, and Texas is one of them. That makes it one of the best places in the country that you could retire in, at least financially.
Current Financial Health of the Texas Retirement System
Texas’ retirement fund system has fallen a bit short of its pension fund investment return benchmark over the last 20 years, but that hasn’t stopped it from managing the retirement needs of its former public workforce well. As a matter of fact, it beat its most recent projection for 2017 by nearly a 1.5x margin.
The Texas retirement system splits its portfolio investments between short-term securities, cash, international/domestic equities, alternative strategies and, most importantly, fixed income. This is fairly typical for most state funds. But the inclusion of less than 25% fixed income securities does create a bit more risk than usual.
Tips for a Less Stressful Retirement
- Even if your state has you well on your way to a successful retirement, you can never plan too much. In other words, make sure that you come up with very exact financial objectives that you want to achieve so that you have a concrete place that you can reach.
- Financial advisors deal with the perils of planning for retirement every day, and they can help you set your strategy up. If you’re interested in finding an advisor located near where you live, SmartAsset’s financial advisor matching tool can set you up with up to three such people. Take a few minutes to fill out the survey associated with this program, and be as truthful as possible.
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