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Do You Qualify for a FICA Alternative Retirement Plan?

Which type of retirement account is right for you? Money Girl answers a voicemail question about using a FICA Alternative Plan, choosing the right retirement plan, and reaching your financial goals. Plus, you'll get an explainer about all those payroll taxes deducted from your paychecks.

By
Laura Adams, MBA,
Episode #592
Do You Qualify for a FICA Alternative Retirement Plan?

A voicemail caller named Jamie says, “I have a mandatory Social Security alternative plan at work where I save about 7 percent. But my goal is to save a total of 15 percent for retirement. Does that mean I should save 15 percent on top of what I’m putting into my existing plan?

Also, I can choose a 457(b) or a 403(b), which both come with a Roth option. Can you explain which type of retirement account would be more beneficial?”

Thanks for your question, Jamie! In this post, I’ll explain what a Social Security alternative plan is, who qualifies for one, and the differences between a 457(b) and a 403(b).

What Is a FICA Alternative Plan?

A Social Security Alternative Plan is more commonly called a FICA Alternative Plan or a FICA Replacement Plan. It’s a private retirement account created for certain workers who are temporary, part-time, or employed by the government and are not eligible to pay into the Social Security system.

Other employees are required to fund the Social Security system by paying FICA payroll taxes, which I’ll explain in a moment. Employers must deduct these taxes from your paychecks and send them to the government on your behalf.

So, think of a FICA plan as a substitute when you don’t pay Social Security taxes. Instead, you’re required to contribute a minimum of 7.5 percent of your wages to a FICA plan account.

Think of a FICA plan as a substitute when you don’t pay Social Security taxes. Instead, you’re required to contribute a minimum of 7.5 percent of your wages to a FICA plan account.

Contributions to a FICA Alternative Plan can come from an employee, employer, or both. It sounds like Jamie is putting in the entire 7.5 percent on her own, which is the most common scenario.

No matter who funds a FICA alternative plan, the employee owns it and controls how the funds are invested. If you leave your employer or move to a position that makes you ineligible for a FICA alternative plan, you can always take the money with you.

Since Jamie’s goal is to save fifteen percent for retirement, one option that her FICA plan may allow is to raise her contribution from 7.5 percent to fifteen percent. Another option is to also contribute 7.5 percent of her income to another retirement account, such as a Roth IRA.

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