Wednesday, June 04, 2014

The Tax Deferred Annuity Program


One of the most popular and important savings program that New York City educators have is the Tax Deferred Annuity (TDA) program.  The TDA is a 403(b) plan and is similar to the 401(k) plan that private companies have but is much better since it is exempt from state and local taxes for educators who live in New York State.

The advantage of the TDA is that all contributions and appreciation grows inside the TDA tax free until the educator is ready to withdrawal the money at retirement and the educatror is at least 59.5 years of age.  Moreover, if the educator retires and keeps his or her New York State residency, the TDA withdrawals are not subject to New York State or local taxes.  However, all TDA withdrawals are subject to federal taxes.

A teacher under the age of 50 can contribute as much as $17,500 to the TDA  and if 50 years of age or older the educator can add a "catch up contribution"of an additional $5,500 for a toatal of $23,000 in a calander year. By contributing to the TDA, the educator not only see the money grow tax free while in the TDA but also has their tax bill reduced as well.

For example, if a teacher contributes $10,000 dollars to the TDA for the 2014 and the educator is in the 15% federal tax bracket, then the educatorwill realize a reduction ofr $1,500 in his or her tax bill.  The same goes for the state and local taxes which combined will see a reduction of about 12% for educators living in New York City.

The TDA offers different funds such as International stock, socially responsible stock, U.S. stocks, inflation protected funds, and a bond fund.  However, the most popular TDA fund is the "Fixed Income Fund:".  This fund gives UFT members a 7% dividend and CSA members a 8.25% dividend at year's end.  These interest rates are guaranteed by the New York State constitution and cannot be reduced.  The fixed income fund is a no risk fund and in our present low inflation environment (2%), putting money in this fund is a no-brainer.  All the TDA funds have miniscule fees and that adds to the appreciation. Unfortunately, an educator cannot contribute outside money to the TDA or put his or her lump sum retro payments into the TDA.  An educator can take a loan from the TDA but its not a good idea.  Rather, take the loan from your pension instead.  I will discuss why in another post.

The bottom line is the more you contribute to the TDA, the more your money appreciates tax free until you start to withdraw it in retirement or when you reach the age of 70.5.  Moreover, the more you contribute into the TDA the less your taxes will be for that year and if you reside in New York State, the TDA withdrawals are exempt from New York State and City taxes.  Its the best deal in town.

48 comments:

Anonymous said...

I had hoped that we would be able to contribute our retro unto our tda funds after retirement but the pension office at the union said that it was prohibited by state law. Seems a shame since that is money I would have put into tda had we gotten it back then.

Anonymous said...

Question for Chaz: How secure is the guaranteed 7% return on the fixed rate TDR? In other words, is it really protected by NY State? Could they change it in the future or would people already enrolled in it be "grandfathered in" with the guaranteed 7% ? My understanding is that if there is a fiscal emergency or if NYC goes bankrupt like Detroit that there really is no guarantee. Thanks for any info. (I have been putting in money to my TDA for a while)

Anonymous said...

Isn't it actually "Tax Deferred Annuity"? And how can so many people not know about their finances??

Anonymous said...

A ny State Constitutional Convention could change the rate.

Chaz said...

anon 9:06

You are so right. My bad

Chaz said...

Anon 8:07

Its possible that under extreme financial crisis like Detroit, the State Legislature would change it but its very unlikely.

OneMoreYearToGo said...

Let's hope that this fiat money is still available when it's our turn to collect. When I started teaching, the TDA sounded like a great thing to get into, but as time went by (and a couple of recessions later), I figured that my money would be better off in something tangible and instantly accessible (real estate - rental cash flow).

Anonymous said...

They changed it from 8.25% to 7 % just a few years back. It can go down again at any time.

retired teacher said...

The TDA rate is set by the legislature. Here's the deal - the legislators have a pension and TDA so they get the same 7%. It is not too likely that they would change it - it would affect their TDA.
Of course nobody can predict what the legislature might do in the future.

Anonymous said...

Can you remove money at anytime with some sort of penalty or is it locked in there forever?

retired teacher said...

One thing I forgot to mention in my last post about the TDA is that teacher pensions are guaranteed by the NY state constitution.
Apparently the teachers' pension fund went bankrupt in 1929 leaving retired teachers with no income. The next rewriting of the constitution changed that.
During the Giuliani years, he constantly called on the state to rewrite or amend the constitution so as to be able to control pension funds from city hall. Thank goodness for Shelly Silver refusing to even consider the idea in committee.

Chaz said...

Retired teacher:


You are 100% correct on both your recent comments.

Anon 8:22

You can take a TDA loan but you must pay it back at 5% interest and if you don't pay it back then you must pay a 10% penalty to the IRS.


Take a loan out of your QPP instead.

Anon 8:20

True, but that was with the union's approval. Unless we suffer from a Detroit style bankruptcy the State will not change the interest rate and the next time3 they can actually chamge is is 2017.

Anonymous said...

I didn't know they account was exempt from State and city taxes. That is a huge bonus to investing in the TDA. Where did you find that information?

Chaz said...

Anon 4:35

From none other than the great Mel Aaroson.

I noticed that... said...

When Shelley Silver steps down or passes away, watch how the faux-democrats with the blood-sucking republicans in the Assembly will amend the pension laws and cry poverty, like Detroit, to diminish or bankrupt the pension system. It will be 1929 all over again!

Just hope and pray that Shelley lives forever!

ed notes online said...

An important point - you can take up to 20K a year out and not have to pay state taxes. In NYS that is a tidy sum you save. Fed taxes still apply.

When you look at what you have understand it is not all yours due to taxes. Thus 100k is more like 80-70k depending on tax bracket - but if you follow the 20k max a year withdrawal plan it is more.

But as to any state leg and constitution guarantee - Cuomo was threatening to convene a new state constitutional committee -- I think that could happen in 2015 - and they could turn 7% into 1% -- just do a public worker bashing campaign - and just "forget" to include themselves - only apply it to public workers - Thing CHicago special rules for teachers passed by the St leg. Think Detroit where a fiscal crisis could kill pensions. (My powers predict a NYC fiscal crises something between 2018-2020 where the UFT tells us if we take our retro then the city will be bankrupt and we must postpone - they did stuff like this in'75 under the "great" Shanker.

I thought in the depression in the 30s they may have fooled around with pension stuff but not sure.

I put max in TDA for years and it has grown quite a bit where the interest alone each year is considerable.

retired teacher said...

There are folks who keep hanging in - not retiring to get another years salary credit. They forget the old rule 88 - if your age and teaching service add up to 88 or over you need to retire or lose money. Befre I retired I thought I'd go another year but doing some calculations I realized that I would only be netting about $40 a check (after taxes.) Not worth killing myself (I taught for 35 years - that was more than enough.)
What monies do you see after retirement that are now deducted from your check? Retirees do not pay state or city tax on their pensions. People who are in service and thinking about retiring need to look at their current check - firstly, you do not have the state/city deduction. Also the TDA is frozen - so add that. Plus there is no deduction for Social Security - all of that adds up to a lot more cash than one would get by staying in the job and being hassled to death by some semi-literate Principal Academy grad who can't read and understand the Danielson rubric.

For the union haters out there - after retirement there is no drug, dental or eyeglass coverage from the city. You have to continue your UFT membership to get those benefits. Yup - retirees are union members although we can't vote for contracts but do vote for leadership (or lack thereof.)

Folks - your pension is important. Educate yourselves. Do not rely on second or third hand information. Once again I suggest you take advantage of all the seminars and meetings the union holds. The pension advisors know their stuff.

Chaz said...

Norm:

The next constitutional convention is 2017 and only them can the State Legislature change the 7% TDA interest rate.


If you retire at 55, meaning you worked to 55 and then retired, the TDA is not subject to early withdrawal penalties.

Chaz said...

Retired teacher:

Where did you hear about the rule of 88? I would certainly like to know where it came from.

retired teacher said...

Chaz - I first heard of the rule of 88 from an accounting teacher many moons ago. Over the years I've heard people mention it. I don't know of its origin or if it's really valid. It does seem to make sense.

Chaz said...

Anon 2:26

It does make sense. I still would like to know if anybody can tell me the origin of rule 88?

Marilyn Shimon said...

Does anyone know where I can get a form to file for Severance pay when retiring as an ATR? Nobody seems to know where this form is but I was told not to submit retirement papers without it.

Marilyn Shimon said...

Does anyone know where I can get the form to collect severance pay as an ATR? I want to retire but was told I shouldnt submit the papers until I have the severance pay form.

Marilyn Shimon said...

Can someone please tell me where I can get a form to collect severance pay as an ATR. I want to retire but was told I shouldnt submit papers without this form.

Chaz said...

You cannot collect the reverence payment until July 3. Therefore, you cannot put in your ret5irement papers on June 30th and get the severance.

To get the severance, you need to put in your retirement papers after July 3 and before August 3.

You can't have both.

Anonymous said...

Can you please explain the difference between a QPP loan and a TDA loan?

anniejay said...

A friend just told me that if you annuitize your TDA you get a larger yearly amount which lasts until you die. Otherwise, you get the MRD's which are USED UP by age 80. It's a gamble but if you die before age 80 you don't care!
Is this true?

Teachtolong said...

Can anyone tell me when the best time of year to move TDA funds from high risk to fixed would be. I'm getting closer to retirement and need to do this but I asm very nervous about making a costly mistake.

Anonymous said...

To Teachdog,
That's a crystal ball question.
May seems to be a good time to exit as a general rule.
Here is a better criteria to consider.
I'll throw this out there like the rule of 88 above.
There is a rule of 110, or 100
110 being aggressive; 100 conservative.
110 - (your age) = what you should have in stocks.
Eg: 110 - 40 = 70 therefore 30% cash 70%stock
Eg: 100 - 40 = 60 therefore 40% cash 60%stock
However, take this tid bit into account...
Since the inception of the stock market, it has a general rare of return on average of 5% (with risk).
While TDA gives you 7% with no headaches.
Wow right! Also, you can simply plug the $ amounts into any program that calculates composing interest, starting principal, monthly contributions, and years to go (about 60 for you), and you can know exactly how much you will have. No guess work.
Here's a bonus... the rule of 72.
This means that whan: years X interest = 72, you will double your money. So getting 7% means you will double your money in just 10 years!
Wow again right?!

Good luck

Anonymous said...

A friend just told me her social security check went down when she withdrew from her tda. Why is that?

Anonymous said...

How much are the union dues for retired members? Are the benefits the same if you pay the union dues?

Anonymous said...

Thank goodness for Shelly Silver for saving our TDA

Christopher Abrahams said...

Why borrow money from your QPP instead of your TDA?

Chaz said...

Because by taking money out of your TDA you are losing interest from the money you withdrawal. On the other hand withdrawing from your QPP is temporary and as long as you pay back the loan before you retire, it has no effect on your pension.

Cevia A. Bishop said...

where does the state get the money to guarantee 7% fixed interest on the TDA?
great investments or borrowing it from nys (bonds)?

irahs said...

I'm not sure that I'm posting to the right place. But, is there another fund approved by the UFT that offers a savings plan that is not Tax Deferred but is almost like a Roth where you pay tax yearly or something like that? I went to a Pension meeting and I thought something like that was presented as an option.

irahs said...

I sent a comment just now but not sure that it was posted. Is there a UFT approved savings plan that is similar to a Roth and not tax deferred -- where tax is paid yearly, or something like that? I thought I heard that a Pension meeting I recently attended.

Anonymous said...

If the fixed interest rate is guaranteed by the NYS constitution, then why did Randi allow the fixed rate to be reduced from 8 1/4 % to 7%?

Chaz said...

Anon 7:17

NYS only guaranteed the 7%. The additional 1.25% was a city contribution which our union leadership negotiated away and the right to impose a Tier V for new hires. We got back the 2 days before Labor day

Anonymous said...

I just scanned the NYT article ( today Oct. 23,2016) titled, " Think Your Retirement Plan is Bad, Talk To A Teacher" which makes the case that TDA 403B Plans are much inferior to 401 K plans because of lack of regulation which results in very high fees paid by teachers. Does this apply to NYC teachers since our TDA is a 403B plan? I'm hoping we are an exception. The article mentioned other states where these high fees are negatively impacting many teachers, but I didn't see mention of NYC.- Any know what the deal is ??? Thanksssss!

Sunset park PS94 said...

The NYTs article in todays paper: "Think you Retirement Plan is Bad, Talk to A teacher", makes the point that 403B retirement plans which are what that most teacher have, are far inferior to 401K plans because they are not subject to the same regulations as 401 Ks, and therefore are able to charge much higher fees. Does anyone know what the deal is for DOE NYC Teachers? The article mentioned New Jersey teachers, but not NYC. I'm pretty sure we have a 403B plan so I'm wondering how high our fees are ?
Thanks !

Sunset park PS94 said...

The NYTs article in todays paper: "Think you Retirement Plan is Bad, Talk to A teacher", makes the point that 403B retirement plans which are what that most teacher have, are far inferior to 401K plans because they are not subject to the same regulations as 401 Ks, and therefore are able to charge much higher fees. Does anyone know what the deal is for DOE NYC Teachers? The article mentioned New Jersey teachers, but not NYC. I'm pretty sure we have a 403B plan so I'm wondering how high our fees are ?
Thanks !

Chaz said...

Our 403b plan (TDA) has extremely low fees unlike NJ and NYSUT's own 403b plan.

Sunset park PS94 said...

Phew !!! Thanks Chaz for clearing that up . I thought it a little odd that the NYT didn't mention NYC plan, but definitely hit on the High fees of NJ.

Sunset park PS94 said...

Phew !!! Thanks Chaz for clearing that up . I thought it a little odd that the NYT didn't mention NYC plan, but definitely hit on the High fees of NJ.

charlie 3 said...

can you recommend the best way to take out a loan for a retired teacher over 65 or is it better to just make a withdrawal ?

Anonymous said...

This is what the rich sat to do. I'm going to take their advice and purchase property for cashflow instead. Real estate done the correct way supersedes any 401k.

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