Tuesday, March 03, 2015
The Tax Advantages By Contributing To The TDA.
In my travels to various schools, I am shocked to find out how little teachers know about the benefits in contributing to their Tax Deferred Annuity Fund (TDA). Some teachers know that the TDA includes various stock funds, a bond fund, and a fixed income fund that pays 7% in annual interest. However, when it comes to understanding that contributing to the TDA not only allows the money to accumulate tax deferred (no money is taxed until you decide to take the money out) but also reduces the present income taxes! Therefore, I decided to take a look at two teachers, one contributes to her TDA while the other does not.
Example: There are two teachers, both single, living in New York City, and each making $80,000 a year. Teacher #1 does not contribute to the TDA while teacher #2 contributes a modest $200 a paycheck to the TDA that reduces her taxable income by $4,800 to $75,200.
Teacher #1: Salary $80,000, Federal Tax = 20% or $15,863
NYS Tax = 6.65% or $5,320
NYC Tax = 3.65% or $2,800
Total Tax =30.30% or $23,983
Teacher #2: Salary $80,000 Federal Tax = 18% or $14,663
NYS Tax = 6.45% or $4,521
NYC Tax = 3.30% or $2,625
Total Tax =27.75% or $22,909
The tax rates come from the Federal, State, and City tax tables and shows that by contributing to the TDA, the teacher reduces her effective income tax by 2.55% and more importantly, saves her approximately $1,074 in Federal, State, and City income taxes. Now you know why you should contribute to your TDA, it reduces the amount of taxes you pay!