If you're a State of Maine employee approaching retirement, you might be thinking about ways to fortify your retirement savings. And if you're like a lot of public sector employees, you might find that you have accrued some Paid Time Off (PTO), such as unused vacation pay, that you don’t have much use for right now.
As a State of Maine employee, you can defer all or some of your unused vacation pay into your Deferred Compensation 457 Maine Saves Plan, up to IRS limits ($19,500 or $26,000 for age 50 or older in 2021). For a lot of people, this is a great option - especially since the funds are available as soon as you retire. Deferring your unused vacation pay into your 457 will:
- Lower your taxable income this year
- Allow you to avoid a sizeable tax hit
- Put the money in the market or a fixed general interest rate higher than a local bank
- Help grow your retirement savings long term
- Allow you to withdraw the money during a different tax calendar year, at your own speed
Let’s take a look at a hypothetical to see how that might work.
John has a MaineSaves 457 account with $100,000 in it. He is retiring this October at age 62, and has unused vacation pay that amounts to $10,000 in compensation.
John doesn’t need the $10,000 right now, but he is certain he can find a use for it in retirement. Rather than taking the vacation pay in cash, paying income taxes on it, and putting into his savings account – which pays almost no interest – he defers it into his 457 plan with the rest of his supplemental retirement savings.
Just like that, John has avoided a big tax bill. Since he knows he will be in a lower income tax bracket in retirement than he is now, he will likely pay lower taxes when he takes it out later, too – after it has had time to grow.
As you stand on the doorstep of retirement, remember that there are easy ways to maximize your savings and lower your taxes to help secure your retirement. And you can do this simply by filling out a one-page Vacation Pay form on our MaineSaves Resources page found under Participant Forms & Links.
Make sure you reach out to your HR Department at least 30 days before retiring to coordinate the decision to defer unused PTO into your 457(b) plan. They will provide you with invaluable guidance and the exact amount of eligible compensation to defer.
As always, if you’re thinking about retiring soon, feel free to schedule a time to chat. We’d be happy to review your options.
Empower is 1 of 3 approved vendors of the MaineSaves Retirement Plan offered to State Employees. IIS Financial Services is an independent financial planning firm and a local representative of Empower for the MaineSaves Plan with offices in South Portland and Augusta, Maine.