A Financial Secret to Benefit You, Teachers

A Financial Secret to Benefit You, Teachers

As we are just finishing up taxes and tax time, I wanted to share a tax saving or financial tip for teachers that you may not be aware of. I have only become aware in the last few months of a certain type of investment or saving account that is open to teachers and some other public employees. This type of account is called a 457 investment account.

I am not going to claim to be an expert, but I will give you a quick synopsis, and a few more sources of information.

 

I learned about a 457 first on the Choose FI podcast episode entitled The Unfair (FI) Advantage Of Teachers | 457b. Another good source of information is the Millionaire Educator blog, specifically the post “7 Reasons to Love your 457 Plan.”

Definition and Advantages of a 457

A few bullet points about what a 457 is, and what the advantages are:

• A 457 is pre-tax savings or investment, similar to a 401k (usually in business) or a 403b (often teachers have this as well). That means your money is going in before it's taxed so you are able to put more in and you're able to reduce your taxable income (lower your tax bracket)
• The rules or a 457 state that you can withdraw when you leave your teaching position, or at age 59.5. This means, if you leave your teaching position, you can withdraw from your 457. 

However, you may need to do some research and work with your HR department. My district did not really seem to publicize the 457 well. I had to do some digging to find out about it. I have heard the same from others as well. However it may be worth the work as it may be a good alternative for you to improve your tax situation and your savings for later.

More information

Here are a few 457 links with some more information

• CNN Money: What’s a 457 Plan?
• Smart Asset: What’s a 457 Plan?

Definitely do your research, they won’t be for everyone, but this has potential to be important enough that I wanted to pass it along. I have been teaching for 12 years, and thought I was relatively on top of my finances, but I had never heard of a 457, and didn’t know it was available. As such, I’m assuming I’m not the only one. This could be a huge advantage if you are teaching but plan to leave your job and stay home with young kids for a while, go back to school, or simply leave the teaching field and pursue a different line of work, but maybe you need some money to tide you over after you leave the position. There is no early withdrawal penalty. You still pay taxes on the money that you withdraw but you don't pay a penalty like you would from any other retirement accounts.

I'd love to hear your comments below.