One of the perks of being a public employee is being able to participate in the state retirement system. Generally, these plans cover teachers, police officers and anyone else who works for a state agency. State retirement funds are often referred to as pensions, but there are some differences in the types of plans that are available. Some states only offer a defined-benefit pension while others also offer a defined-contribution plan.
A defined-benefit pension promises you a specific benefit when you retire. Your employer kicks in a set amount of cash, and you may also have the option of adding money through elective deferrals. The amount you can contribute varies by state. For example, Virginia state employees can chip in up to 5 percent of their pre-tax salary, but Florida employees are limited to 3 percent. Typically, your benefits are paid out as a lifetime monthly annuity, though some plans may offer a lump-sum payout. The amount of money you'll get is usually based on your age, how long you've worked for your employer and your salary.
With a defined-contribution plan, the amount of money you'll get at retirement is based on how much you and your employer put in and how well your investments perform. These plans work similarly to a traditional 401(k), and the amount you can contribute depends on your state's plan. For example, South Carolina employees can stash up to 7.5 percent of their pre-tax salary in the state's Optional Retirement Program on top of the 5 percent employer contribution. Typically, these types of plans offer the lifetime annuity option, or you can get all your money at once in a lump sum.
Depending on which state you live in, you may have the option of enrolling in other types of pension plans. In Virginia, state employees can sign up for the 457 deferred compensation plan, which allows you to set aside a specific amount of money toward your retirement each year. As of 2013, employees could sock away $17,500 annually in their Virginia 457 plan. States can also offer other tax-advantage retirement options, including 403(b) plans, cash incentive plans and specialized plans targeted at specific groups of employees, such as correctional officers or elected officials.
Pros and Cons
State-sponsored pension plans offer several advantages compared with private pensions. Typically, your enrollment is automatic as soon as you're hired, which means you can start building your nest egg right away. These plans also tend to offer higher employer matches than private plans. If you decide to leave public service, you can roll your pension benefits over to another qualified plan to defer taxes. Keep in mind that you'll owe taxes on the money if you don't roll it over. You may also have to wait a specific length of time before you can collect your benefits. If you leave your job before you're fully vested, you'll only be able to take out the money you put in.
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