The investments that Utah has made with its public employee pension funds have paid off handsomely in recent years. However, its state income taxes can be a bit heavy at a 5% rate. There are also a number of retirement systems in Utah, which the state divides between Tier 1 and Tier 2 systems. It’s important to understand how each works as you’re preparing a retirement plan so you can estimate what you’ll receive from your fund. A financial advisor can help you navigate your retirement benefits and help you build the right retirement plan for you.
Types of Retirement Systems in Utah
Unlike most states’ retirement systems that consist of internal membership tiers within them, Utah splits its systems into two overarching levels: Tier 1 and Tier 2. Your system and benefits will fall under Tier 1 if your hiring date was before 7/1/2011, while Tier 2 members whose hiring date was after that time.
Tier 1 Systems
| Plan Title | Eligible Employees |
| Public Employees’ Contributory and Noncontributory Retirement Systems | – Teachers who work at least half-time – Elected or appointed officials who earn the minimum salary each month throughout their terms – Those who offer services through an employee leasing program |
| Public Safety Retirement System | – Police, correctional and special function officers – Eligible certified dispatchers – Full-time Board of Pardons and Parole members |
| Firefighters’ Retirement System | – Regularly constituted fire department employees – State fire marshals and deputy state fire marshals |
| Utah Governors & Legislators Retirement Plan | – Utah governors and those in the state legislature |
| Judges’ Retirement System | – Judges/justices working in the Utah courts |
Tier 2 Systems
| Plan Title | Eligible Employees |
| Public Employee Hybrid System & Defined Contribution Plan | – Teachers who teach at least half-time and receive typical benefits – Full-time appointed officers – Anyone who offers services through an employee leasing program – Those who normally receive state benefits and average 20+ hours a week |
| Public Safety & Firefighter Hybrid System & Defined Contribution Plan | – Public safety, law enforcement, correctional and special function officers – Full-time members of the Board of Pardons and Parole – Employees of regularly constituted fire departments – Full-time deputy state fire marshals and state fire marshals |
Overview of Utah’s Retirement Systems
Public Employees’ Contributory and Noncontributory Retirement Systems
Each of these Tier 1 systems is similar in terms of offered benefits. However, the way these systems are funded differs drastically. More specifically, a contributory plan is built based on the contributions of employers and employees, while noncontributory plans are funded solely from employer contributions.
Public Safety Retirement System
The size of the distributions that participants of this plan will receive depends on your years of service, final average monthly salary and the total of your three highest annual salaries. Some system members may be able to receive health insurance and cost-of-living increases, as well as the naming of beneficiaries.
Firefighters’ Retirement System
Every year on the anniversary of your retirement date, members of this system get cost-of-living adjustments, with an annual cap of 4%. Active members also receive death benefits that allow you to financially take care of your spouse, children or a beneficiary of your choice.
Utah Governors & Legislators Retirement Plan
This plan comes with death benefits not only for retired members but also for those who have not entered retirement yet. Participants can also choose between two different styles of retirement payments. One allows you to have full-size monthly distributions, while the partial lump-sum option affords you a 12- or 24-month payment and significantly smaller monthly distributions.
Judges’ Retirement System
The Judges’ Retirement System is a fairly normal program. It features perks like health insurance, up to 4% cost-of-living increases and the ability to return to work following retirement. Your benefits are also immune to garnishment or any other legal process.
Public Employee Hybrid System
This unique hybrid program gives participants the benefits of both a traditional 401(k) and a pension plan. On top of that, your employer will contribute a sizable 10% of your paychecks to your retirement account. There are up to 36.89% penalties for taking your retirement early, though.
Public Safety & Firefighter Hybrid System
Similar to the above hybrid retirement system, this firefighter-centric system combines a pension plan and 401(k). That gives you premier customization ability. Perhaps one of the greatest benefits of this system is the six retirement payout options you have. These allow you to give your spouse or a beneficiary some form of financial assistance, on top of death benefits.
Public Employee/Public Safety & Firefighter Defined Contribution Plans
These defined contribution plans are fundamentally different from the defined benefit plans above in that investment decisions are made by participants. The Public Employee plan has your employer contributing 10% of your paycheck to the plan, whereas the Public Safety & Firefighter plan calls for 12%. All other contributions are up to you.
Retirement Taxes in Utah
When looking at your retirement income it’s important to understand how you’ll be taxed. There are certain rules about taxing your retirement income depending on the type of account you’re using. For example, a traditional IRA is going to be taxed differently when you withdraw the funds than a Roth 401(k). There are also federal and state-specific stats to be aware of as you’re making a retirement plan.
Federal Taxes
The federal income tax will not apply to the funds that you have placed into your state retirement account. That’s because it’s not technically income yet and will hold the title of “tax deferred.” But whenever it comes to taxes, deferment is always temporary. So when you retire and begin receiving distributions, only then will the federal government begin charging you income tax.
Traditionally these payments are taken from your account in the form of withholdings. These can sometimes end up in owing money or having too much taken in the first place. So you could try making estimated tax payments once every quarter, which tends to be more exact.
A 401(k) or IRA rollover is another option. A rollover will continue to defer federal taxes from touching your retirement assets. But once that money makes its way out of your secondary account, the federal income tax will take effect. The only situation in which this doesn’t apply is with a Roth IRA. For these, you pay your taxes upfront.
State Taxes in Utah
In Utah, all retirement income is taxable at a 5% flat rate. That’s regardless of whether it’s a private account or from a public pension fund. The retirement tax credit of the state is significantly lower than most others. It only allows a max credit of $450. If you’re over the age of 65, your credit will either be $450 or 6% of your eligible income, whichever is less. But should you be younger than that, your credit will top out at $288.
You will lose out on some credit depending on what status you’re filing your state return under and how much you’ve made over the year. These drops go as follows:
- Single: 2.5 cents per dollar over $25,000
- Joint: 2.5 cents per dollar over $32,000
Current Financial Health of the Utah Retirement System
Utah’s retirement system is doing fantastic, which is good news for both retirees and current public employees. The defined benefit systems of the state increased in value by $3.3 billion. That’s a massive 11.7% boost from the prior year. The $750 million jump in the defined contribution plans is significantly less. But it still represents solid growth over just one year.
Much of this improvement is because of an increase in risk tolerance of the investments Utah chooses for its pension funds. Although this is undoubtedly a risky move, it seems to have paid off handsomely this time around.
The Bottom Line
The Utah Retirement System, collectively, offers benefits through a number of different groups and systems. From firefighters to judges, Utah offers a lot of retirement systems for most employees working for the government. It’s important to understand how your benefits work and when you’ll receive them and how those benefits will be taxed before you get close to retirement. You can make those data points part of your overall retirement plan.
Tips for Your Future Retirement
- Ironing out exact financial goals is an important step in planning your retirement. Rather than approach this time with a purposeless amount of money, figure out what you want to purchase. Then prepare the funding for that. Anything left over is just a bonus.
- Retirement planning is a common prowess for many financial advisors, who can help you make the right retirement plan and help you reach your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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