Many teachers and public workers leave before retirement age. When you do, your pension plan gives you a choice: take back your contributions now, or leave them in and collect a pension later. The right answer depends mostly on how many years you have and how far you are from retirement age.
What a refund includes
A refund returns the money you paid in, usually with some interest. It does not include the employer’s contributions. In most teacher plans the employer pays a large share of the cost, so a refund gives up most of what your service was worth.
The refund is taxable income in the year you take it unless you roll it into an IRA or another retirement plan. If you are under 55 in the year you leave, the IRS usually adds a 10% early withdrawal penalty on the amount you do not roll over.
What a deferred pension includes
If you are vested, you can leave your money in and collect a pension starting at the plan’s retirement age. The amount uses your service and salary when you left, so a teacher with 10 years at a $60,000 average in a 2.3% plan would be due 23% of $60,000, or $13,800 a year, at the plan’s normal retirement age.
That amount is fixed until you retire, and most plans do not add inflation increases during the waiting years. A pension earned at 35 and collected at 62 has lost much of its buying power by the time it starts. Even so, it is often worth more than the refund.
Comparing the two
A simple way to compare is to ask what the refund would grow to if you rolled it into an IRA, and what monthly income that balance could pay at retirement age. Then set that against the deferred pension.
Rough rules of thumb:
- Not vested. Take the refund and roll it over. There is nothing else to claim.
- Vested, short service, young. The refund rolled into an IRA often matches or beats a small deferred pension.
- Ten or more years, or within 15 years of retirement age. The deferred pension usually wins clearly, especially if it qualifies for a COLA after it starts.
Keeping the door open
Leaving your contributions in also preserves your service credit. If you return to teaching in the same state, your earlier years count again, often toward a higher final salary. If you take a refund and later come back, most plans let you buy the years back, but at a price that includes interest. See buying service credit.
Before you decide
Ask your plan for both figures in writing: the refund amount today and the deferred pension estimate at normal retirement age. If you are moving to another public job, check whether the new plan would let you buy your old service, and read moving states mid-career first.