Broadcast Live Tuesday 7/17/2018
Everything you need to know about the U Texas Retirement Accounts
The University of Texas Retirement Program accounts
(1) 401(a) Pension – Texas Retirement Service “TRS” 401(a) pension
(2) 403(b) – Optional Retirement Program “ORP”
(3) 403(b) – Tax Sheltered Annuity “TSA”
(4) 457(b) – Deferred Compensation Plan “DCP” (governmental)
You must choose #1 or #2. #3 and #4 are optional.
Please see my previous post regarding choosing TRS vs. ORP
I go in great detail in the video
Here are the graphics from the video and some explanations.
Note: for 2019, please see addendum at bottom
Maximum retirement contributions with ORP
If under age 50, you can get $73,500 with the ORP option into U Texas retirement accounts as seen below. Including $5,500 in your IRA, you can invest $79,000 in tax sheltered accounts.
These numbers are $79,500 (U Texas), $6,500 (IRA), and $86,000 total if age 50+.
Maximum retirement contributions with TRS
With the TRS option, you can get $2,000 extra in tax-sheltered retirement accounts; however, the employer “match” is smaller than the TRS option (6.8% vs 8.5% match), so the employee is effectively getting paid less.
Maximum Contributions per account by income (age <50)
*Savings Rate = (Total invested including employer contribution) / (base wages + employer contribution)
U Texas Retirement Accounts all in 1 Chart
**Vesting refers to the portion of the investment that is ‘owned’ by the employee; companies require a waiting period before the employer portion is vested (owned) by the employee; if an employee leaves the employer, the unvested portion is taken back by the employer when the employee leaves, and the vested portion is kept by the employee
***When choosing Roth contribution or pretax contribution to the TSA 403(b), you want to know what your marginal tax rate will be for that year; it may be advantageous to wait until last few months of the year to make your contribution so you can choose Roth or pre-tax contributions
***After separation of service (leaving an employer), the minimum age at which someone can withdraw funds from the account without a penalty varies. 457b funds can be taken immediately after separation of service and added to taxable income
2018 IRS Limits
Elective Deferral Limit
The IRS allows an aggregate total of $18,500 to be electively (voluntarily) deferred (withheld) from an EMPLOYEE’s paycheck to be invested in 401k and/or 403b accounts total.
For example, you could have $9,250 go into a 401k and $9,250 into a 403b.
If you are 50 or older, the limit is $6,000 higher, $24,500 in total.
Note, elective deferrals can be Roth and/or pretax (traditional)
The ORP exception
The ORP, even though it is a 403b, and even though a portion of it comes from the EMPLOYEE paycheck, because it is a non-voluntary contribution, it does NOT count toward the $18,500 elective deferral limit. It does however count toward the $55,000 limit.
Total 401k/403b Limit
If you are a U Texas employee, you have a 403b. The IRS allows an aggregate total of $55,000 to go into all 401k and 403b accounts in a calendar year for anyone with a 403b plan. This includes EMPLOYEE contributions as well as EMPLOYER contributions (match) across all 401k and 403b accounts.
Example: if you are fortunate enough to have a 401k at another employer and put in $10,000 as EMPLOYEE deferrals and get $10,000 as EMPLOYER match, then you have filled up $20,000 of this limit. You have a total of $35,000 left that can go into the 403b from EMPLOYEE and EMPLOYER without any tax penalties.
The IRS allows a total of $18,500 to be electively (voluntarily) deferred (withheld) from an EMPLOYEE’s paycheck to be invested in a 457b.
If you are 50 or older, the limit is $6,000 higher, $24,500 in total.
IRA (Individual Retirement Account) Limit
IRA contributions are capped at $5,500.
If you are 50 or older, the limit is $6,500.
IRA contributions can go to a traditional IRA or directly to a Roth IRA.
However, if you are married and have a modified Adjusted Gross Income above $189,000, the amount you can contribute directly into a Roth IRA is limited.
There is no income limitation for traditional IRA contributions. Anyone can contribute to a traditional IRA. The deductibility of this contribution, however, is dependent on many factors, to be addressed elsewhere.
For most high income physicians, you cannot contribute directly to a Roth IRA, and as long as you do not have any pre-tax IRA money (e.g. a SEP-IRA, SIMPLE IRA, or pre-tax IRA money), you can do a 2 step process:
(1) non-deductible contribution to a traditional IRA
(2) Roth conversion of the traditional IRA
to effectively put your money into the Roth IRA, although not directly.
This 2 step process is routinely referred to as the “backdoor Roth IRA.”
Roth vs. Non-Roth Contributions
The DCP 457b only allows pre-tax (traditional) contributions, not Roth.
The TSA 403b allows either pre-tax or Roth contributions.
The ORP 403b only allows pre-tax contributions (employer and employee)
IRA accounts allow
- deductible (pretax) contributions into a traditional IRA (income limited)
- non-deductible contributions into a traditional IRA (not income limited)
- post-tax contributions into a Roth IRA (income limited)
Priority of accounts
- You must choose the TRS or ORP.
- If you have the opportunity to take the ORP, I think that is a better decision for most people as long as you can manage or have help managing your investments. Please see my previous post regarding choosing TRS vs. ORP.
- Money goes into here monthly from your paycheck, no front-loading allowed.
- DCP 457b
- This is a GOVERNMENTAL 457b, which is the best kind. If you leave your job, you can keep this account open with investments, and you are at very very little risk of the money being taken by creditors.
- For non-governmental 457b accounts, your money can be at risk to creditors and upon leaving your employer (“separation of service”) you may have to take all the investments out as a lump sum, puling your income to a higher bracket than it originally would have been taxed at had the money never been contributed.
- 457b accounts do NOT have a penalty for early withdrawal once you leave your employer. Other accounts have a 10% extra tax if you are not age 59.5. This does not apply to 457b accounts. As such, because this has one less string attached, this is a superior fund to a pretax 403b, which does have an early withdrawal penalty if withdrawn before at 59.5. (*note, there are other ways to get 403b/401k/IRA money out before age 59.5 without a penalty, but there are still some hoops to jump through). With the 457b, there are no hoops.
- We front-load this account every year. e.g. fill it up in January-February
- TSA 403b
- We do this one after the 457b due to the extra “strings” of the 403b.
- The only reason I would consider doing this first is if I could not do both accounts filled up in 1 year, and I am favoring doing Roth contributions for this particular tax year. Since the DCP 457b does NOT have a Roth option, if you want to go Roth, this should be priority 2, and the DCP 457b should be priority 3.
There is no reason not to front-load your DCP 457b.
You may want to wait until the last few months of the year if you want to contribute the TSA 403b money as pre-tax or Roth depending on your marginal tax rate for that year.
For example, you could be on the cusp of the getting up into the 32% bracket. If you get into the 32% bracket, for most people early in their careers without multiple millions in pre-tax money, I think it is prudent to invest pre-tax, since the likelihood of having withdrawals due to “required minimum distributions” at age 70+ that exceed this bracket are very low, unless you are still working at that time. If you are just below the 32% bracket, you will still be in the 24% bracket, which is an 8% savings. If you expect to be in the 32% bracket or higher for much of your earning career (e.g. 400k+ joint earnings), it would be reasonable to do Roth at 24% while you have the chance. This could apply to someone who just finished residency/fellowship and has 6 months of high income, but the following year, the person could have 12 months of high income.
For people age 50+
If you are already 50 years old or will be by the end of the year, the IRS allows “catch-up” contributions.
IRA: $1000 additional contribution
401k: $6000 additional employee deferral
403b: $6000 additional employee deferral
457b: $6000 additional employee deferral
For example, with ORP + TSA, the combined amount can be $55,000 + $6000 = $61,000 in 2018. The ORP amount would not change, but the TSA amount could be $6000 higher.
For 2019, the limits have changed
401k: $19,000 (employee deferral)
457b: $19,000 (employee deferral)
403b: $19,000 (employee deferral)
403b: $56,000 (employer + employee combined; includes ORP & TSA)
Catch-up contribution amounts are not different ($1000 for IRA and $6000 for 401k, 403b, and 457b).
ORP contribution amount is based on $280,000 maximum in 2019 (was $275,000 in 2018).