Attention all police officers, firefighters and teachers: How would you like to live on 50 percent of what you live on now? While the state of your current pension plans appear to have improved, it was only a few years ago there was talk of fixing them through targeted reforms or replacing them with 401-k's.

Why was there talk of reform? For three reasons that are still being felt today. One, when the stock market crashed after the dot-com collapse, some pension assets slumped. That forced government entities to suddenly make large contributions just as the state was entering a fiscal crisis. Secondly, the legislature boosted benefits for state employees in 2000, increases that spread throughout California as local government employees sought the same sort of deals. Finally, government employees, like everyone else, are living longer.

While public pensions are still in bad shape, it's difficult to make sweeping statements about public pensions because government employees are not covered by a single system. Instead, workers negotiate pension benefits with their employers, which could be state agencies, universities, cities, counties or special districts. Both workers and employers generally contribute money into funds to pay the benefits. These funds are managed by several different agencies of varying sizes. The largest of these is the California Public Employees' Retirement System. CalPERS manages pension funds covering 1.4 million workers and retirees from 2,500 state agencies, schools and local entities such as counties, cities and special districts. The next-largest chunk of obligation is the California State Teachers' Retirement System, which covers about 754,000 active and retired educators.

"What all government employees, namely police officers, firefighters and teachers, need to learn is what other benefits are offered, and more importantly, how to take advantage of them."

What all government employees, namely police officers, firefighters and teachers, need to learn is what other benefits are offered, and more importantly, how to take advantage of them. Most people fail to realize that some benefits are elective.

Certain employers are allowed to provide Internal Revenue Code (IRC) 403-b Tax-Sheltered plans. These include public schools, colleges and universities, churches, public hospitals and any charitable entity classified as tax-exempt under section 501-c3 of the IRC. Basically, 403-b plans are similar to 401-k plans maintained by for-profit entities. Just as with a 401-k plan, a 403-b plan lets employees defer some of their salary for retirement purposes. The funds in this account generally are not taxed by the federal government or by most state governments until they are distributed.

There are currently four types of investment products that may be purchased under Section 403-b of the IRC. They include mutual funds, fixed annuities, variable annuities, and indexed annuities. There are limits on the amount of contributions that can be made to your 403-b account each year. If contributions made to your 403-b account exceed the contribution limits, penalties may apply. The maximum amount contributable for 2006 is the smaller of $15,000 or up to 100 percent of compensation. If you will be age 50 or older by the end of the year, you may also be able to make additional catch-up contributions of $5,000. If your employer matches you may be entitled to make even more contributions.

These additional contributions cannot be made with after-tax employee contributions. A 403-b plan allows you flexibility and control in choosing your own investments. The money deposited into your 403-b plan is deducted from your normal pay. Distributions from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59A½ may be subject to an additional tax of 10 percent. California school employers offer 403-b plans as a supplement to, rather than a replacement for, defined benefit pensions. In other words, a 403-b plan may provide you an additional source of retirement income.

For other government employees, such as police officers and firefighters, a 457 plan is offered as a supplement to their retirement. A 457 plan is a non-qualified tax-deferred compensation plan that works similar to a 401-k and a 403-b plan. Employees are allowed to defer compensation on a pre-tax basis through payroll deductions that further allows them to defer federal and sometimes state taxes until the assets are withdrawn.

The contribution limit for 2006 is $15,000. Through tax year 2006, participants who are age 50 and over are eligible for additional salary reduction contributions. For year 2006 it is $5,000 a year. With a Section 457 plan, distributions can be made before the calendar year the participant reaches age 59A½, severance from employment, or an unforeseeable emergency such as a severe financial hardship, unexpected illness or accident. A plan participant may roll over distributions into an IRA or other eligible plan under the same rules that apply to rollovers from qualified plans, without incurring income tax. Participants in a 457 plan may also rollover a Section 457 plan to another Section 457 plan without incurring income tax on the amount rolled over.


Jeff Springgate of Total Financial Solutions is a financial counselor. Direct questions or suggestions to tfm@insidescv.com.