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!


Anonymous said...

Great piece CHAZ.
Sorry for the off topic question though: Do you know when the Danielson framework sunsets? I'm hearing from colleagues that it's up in Spring 2017. Are you aware of this is true and also, what are the chances of NY not resubmitting it for use?

Anonymous said...

Also, you do not pay state taxes when you take out the TDA money.

Chaz said...

Anon 8:35

Right you are but I was referring to the upfront savings on taxes.

Annon 9:25

There is no sunset provision that I know of.

Anonymous said...

No state tax on TDA withdrawals? Is that principal or interest or both?

Chaz said...

Anon 4:52


Anonymous said...

That's %$%^& awesome.

Anonymous said...

Also, another advantage: suppose the teacher elects the fixed income fund to invest in, it will grow thanks to compounding of interest, tax free, until withdrawn or required minimum distribution must begin.

Anonymous said...

Chaz if the first 20k has no ny state tax...what about someone living in Florida ? that is crazy the entire TDA is not state free.

Chaz said...

The TDA is not subject to State or local taxe as long as you reside in New York.