We often work with State of Alaska employees who are getting ready to hang up their proverbial working hats to sail off into the retirement sunset (some even literally!). While creating financial plans for these clients, we have uncovered what seems to be a well-kept secret. It’s the PERS Voluntary Savings Plan, also known as the Employee’s Savings Account. It is available to any Tier I, II, III employee who is making contributions to PERS. The plan allows for after-tax voluntary contributions that are separate and completely independent from the mandatory contributions required by the retirement system.
So why would you want to put even more away than you’re already contributing to PERS? Here are two reasons that will knock your socks off:
- Its unheard-of yield for a savings account in today’s market: You can contribute as little as $5.00 and up to a max of 5% of your gross salary to a Voluntary Savings Plan, which will accrue 4.5% interest until the funds are disbursed.
- Flexibility: You can enroll at any time and you can terminate at any time. You can also change the amount you are contributing at any time (all changes are effective on the first of the month of the following month after the election is made). This means that you aren’t locking yourself in, but you can “force” yourself to save by automating additional savings from each paycheck. There is also quite a bit of flexibility in terms of how the account can be disbursed to you. You can choose from taking the account balance in one lump sum, as an annuity, or in installments.
The Voluntary Savings Plan is a great way to create a separate reserves account for retirement. However, there are two important items to note about the Plan: 1.) you pay ordinary income tax on the interest portion only at the time the account begins distribution, and 2.) once distribution begins, the interest no longer accrues on the remaining balance left in the savings plan. Thus, there are tax and cash flow implications that should be considered before you make your one-time election on your distribution method.
In addition to the Voluntary Savings plan, the 457 Deferred Compensation Plan is also a very useful tool that many State of Alaska employees are already taking advantage of. But it too has a hidden gem that can be easily overlooked – the special catch-up provision. The special catch-up allows employees who didn’t max out the annual deferral amount in previous years to make catch-up deferrals up to 2 times the annual deferral amount during the 3 consecutive years preceding retirement. That means that in 2016 you can defer up to a total of $36,000.
As always, the best practice is to consult your financial advisor and CPA to determine your optimal savings plan. Having a variety of account types (after-tax, tax-exempt, and tax-deferred) allows for more flexibility as you strategize your cash flow in retirement.
Associate Financial Planner