Wednesday, January 20, 2016
With The New Year, Think About Increasing Your TDA Contribution.
The new year has started and I am shocked how little some educators contribute to their TDA. In the school I am in now, I had to encourage some teachers to put in money into their TDA. A few who did have money in their TDA had allocated less than 5% of their paycheck. Ihis post is my recommendation to educators on why its important to contribute as much as you can to your TDA contribution.
First, the minimum I recommend for educators is to contribute 10% of your paycheck. Yes, I know that 10% seems like a lot but it really is not 10% because you save on taxes, If you live in New York City, educators will be paying a combined 27% tax rate (15% federal and 12% state and local). Therefore if an educator contributes, say $10,000 to their TDA from their paycheck, they will save $2,700 from their taxes. That's right, because the $10,000 will not be taxed and even if you take the money out after you turn 55 years of age and reside in New York State only the federal government taxes need to be paid as the TDA is exempt from State and Local taxes.
Second, the TDA money is taken out in 24 checks annually and you can adjust your take home pay to minimize the pain since you will be taxed on a lower salary. For example, the $10,000 will result in a $417 reduction per paycheck. However, since your salary that is taxed is also reduced by 10%, the $2,700 reduction in taxes will allow you to recover $113 per paycheck. Therefore, the actual reduction in take home pay is $304 per paycheck.
Third, remember, the TDA contributions are tax deferred and accumulate interest for the decades during your working career without being taxed and will be exempt from State and City taxes if you decide to live in New York State when you retire and withdraw the TDA funds.
Finally, at retirement, you have at least three choices for your TDA. You can make it an annuity, convert it to the fixed income fund and which gives you 7% interest (UFT titles) or 8,25% (non UFT titles) and take the interest, or take a fixed sum annually based upon your wants or needs.while keeping an asset allocation that allows you to combat the eroding effects of inflation.
Once, you start putting in the 10%, then increase your contribution rate annually by 2%, after receiving a raise. By the time you retire you will probably max out your yearly TDA contribution ($18,000 or $24,000 if you are 50 years of age or older). The end result of the "short-term pain for the long-term gain"will be you may end up a millionaire with or even without your pension or Social Security. What a wonderful thought.