CalSTRS Pension2 – Account Types - YouTube

Hi I'm Rachel, an employee here at CalSTRS. Now that you've watched Part 1

of this series and have a better understanding of what Pension2 is and

why it's an integral part of the CalSTRS hybrid Retirement System, it's important

to understand the differences between the four supplemental savings plans. A 403 (b),

a Roth 403(b), a 457(b) and a Roth 457(b) plan. The investment options within each

plan are the same, what differs is how each one functions in your unique

situation. In a 403(b) plan your contributions are tax-deferred. That

means the amount of money you choose to contribute to the plan comes out of your

paycheck on a pre-tax basis - before taxes have been taken out. This will also

reduce your taxable income every year come tax time and potentially put you in

a lower tax bracket. In addition to your contributions, your 403(b) earnings are

also tax-deferred, which means you don't pay any taxes on your earnings during

the year. So how do you tax-deferred plans work? Remember, the amount you

contribute to the plan each month is taken from your paycheck before taxes

have been taken out. Let's look at an example.

If you were paid $100 after taxes, your take-home pay would be about $75.

Assuming a 25 percent Federal income tax rate. However if you choose to

contribute $100 to your Pension2 403(b) account, the full $100 would go into the account.

Therefore, you would have saved yourself $25 and you would

have more money on which to earn interest. So it's kind of like a double

savings. Only when you withdraw the money do you pay taxes.

The Pension2 457 plan is similar to its traditional 403(b) counterpart in that contributions are

made on a pre-tax basis. The difference between the two comes into play when you

attempt to access your funds. A 457 plan allows you penalty-free access to your

account as soon as you separate from your employer, regardless of your age.

A 403(b) plan requires you to reach age 59 1/2 before taking penalty free

distributions. Keep in mind you cannot take withdrawals

from your 457 plan until you're separated from your employer or age 70 1/2,

whereas in a 403(b) plan you're eligible to take withdrawals at

59 1/2, even if you're still working for the same employer.

With a Roth 403(b) or 457(b), all of your contributions are made on a post tax

basis. Since taxes are already deducted, the funds you contribute to the plan

will not be taxed when you access them in retirement. This also means that any

returns you make on these invested funds will not be taxed. Deciding when to pay

the taxes on supplemental saving plans is important. You should consult a tax

professional to determine the best option for your situation.

You're eligible to participate in a 403(b) and a 457 plan

simultaneously, but your employer would have to make each plan available for you

to participate. It's important to remember that not all plans are

available in all school districts. You must also ensure that Pension2 is an

approved vendor in your district before enrolling. If you have additional

questions about any of these plans, visit Pension2.com, or call the CalSTRS

Pension2 hotline. Okay, ready to take the next step? Watch Part 3

of this series to learn how to enroll in Pension2.