Boston Public Schools Sick Leave Buyback: How to Defer Taxes into a 403(b) and 457(b)
If an account (403b or 457) doesn’t exist when the buyback is processed, the chance to defer taxes is permanently lost — there is no retroactive option.
How Boston Public Schools Employees Can Maximize Their Buyback Payment
Boston Public Schools remains one of the few school systems that still allows teachers to sell back unused sick time upon retirement. For many, this buyback can be a substantial source of taxable income. With careful planning, a large portion of that payment can be deferred into retirement accounts — lowering your taxable income in the year you retire.
How Your Sick Buyback Is Paid
Boston issues sick leave buyback payments in two installments:
- The first payment is issued in the calendar year you retire — it is eligible for deferral.
- The second payment is issued the following calendar year — this payment is fully taxable and cannot be deferred.
Principals and Managers Have More Payout Options
Unlike teachers, who receive their sick buyback in a fixed two-installment schedule, Boston principals and managers can choose from four payout structures:
- All cash, year one. Take the entire buyback as taxable cash in the year you retire.
- Split cash across two tax years. Divide the buyback into two cash payments, one in each of two tax years, to spread the taxable income.
- Defer, then cash out in year one. Defer part of the buyback into your 403(b) and/or 457(b), and take the remaining balance as cash in the same year.
- Defer in year one, cash out in year two. Defer part of the buyback in year one, then take the remaining balance as cash in year two.
As with the teacher buyback, any amount you want to defer must go into a 403(b) or 457(b) account that’s already open before the buyback is processed—there’s no retroactive option here either.
Accounts Must Be Open Before Submitting Buyback Paperwork
This is the most common and costly mistake. Your 403(b) and/or 457(b) accounts must be open and active while you’re still employed. If an account doesn’t exist when the buyback is processed, the chance to defer taxes is permanently lost — there is no retroactive option. (Most employees deferring income already have a 403(b) account, but few also have a 457.)
While you are working, 457 SmartPlan, maybe $10 per check pre-tax, just like your 403 (b), so when the time comes for your sick buyback, you have the plumbing in place.
403(b) and 457(b) Plans for Boston Public Schools Employees
District employees have access to both a 403(b) and the Massachusetts SMART Plan 457(b). Since the IRS treats these as separate plan types, you can fully contribute to both in the same year — stacking significant tax-deferred savings.
Sick Buyback: Total Deferral Room |
Amount |
|---|---|
| SMART Plan (457) special catch-up | $49,000 |
| 403(b) basic limit | $24,500 |
| Base total (before age catch-up) | $73,500 |
| If age 50–59: + catch-up | $8,000 |
| Total if age 50–59 | $81,500 |
| If age 60–63: + catch-up | $11,250 |
| Total if age 60–63 | $84,750 |
What Boston Public Employees Should Know Before Retiring
- Open your 403(b) and/or 457(b) SMART Plan accounts before submitting any buyback or retirement paperwork — there is no retroactive option.
- Calculate your year-to-date contributions to both plans and determine how much room remains.
- Identify which 457(b) catch-up option applies: standard age-50+, enhanced age 60-63, or the 3-year pre-retirement catch-up.
- If prior-year W-2 wages exceeded $150,000, confirm that the 403(b) catch-up is set up as a Roth contribution.
- Coordinate deferral elections with BPS Payroll to ensure the first buyback payment is directed into your retirement account.
- Plan for the second payment — it is fully taxable in the year after retirement; adjust your estimated taxes accordingly.
Pre-1998 403(b) Contributions for Boston Public Schools Employees
One issue is that pre-1998 contributions to a 403(b) in Massachusetts were made before the federal law, but not before state law.
When people withdraw funds, they need to know how much was contributed under the old law. Boston makes it fairly easy to find records for contributions from 1992 to 1997, but it gets harder for earlier years. It’s unclear how much longer those records will be easy to access.
If you have such contributions, we should try to get that information now.
Planning Your Retirement Strategy: Rolling Over to an IRA
Once retired, you can roll over both your 403(b) and 457(b) balances into a single IRA. This makes account management easier, offers more options for investments and withdrawals, and doesn’t impact the deferral limits for your retirement year. It’s especially helpful for employees who maxed out contributions and want to keep everything in one place.
Tim's BPS Buyback Retirement Process
Your 403(b) and 457(b) accounts must be set up while you are still working. If you wait until you receive your buyback paperwork, it will be too late. This process gets you ready.
- Calculate your maximum deferral across both the 403(b) and 457(b)
- Get both accounts open while you are still working
- Allocate your investments in each plan
- Handle the deferral paperwork with BPS Payroll
- Evaluate your IRA rollover after retirement
- Analysis of Medicare premiums and IRMAA
Don’t wait until you file your retirement paperwork — contact me today to get both accounts opened.
“I have been working with Tim for over 30 years. At all times Tim has made himself available to answer any of my questions or concerns. His explanations on market trends have always been thorough and helpful. “
Kathy Rodger
Client: Retired Teacher
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These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.