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.