Thursday, October 06, 2016
Why You Should Put As Much Money As Possible In The TDA.
One of the greatest perks we have as UFT members is the Tax Deferred Annuity (TDA). How good is our TDA? Well, most Financial Advisors, are shocked and jealous that the Fixed Income Option pays a guaranteed 7% return on the TDA principal (non UFT members in the DOE receive 8.25%). With historically low interests rates (1%) and banks and money markets struggling to give 0.25% on short-term funds and 1% for longer term treasures like CD's, the TDA's 7% interest rate is an unbelievable windfall for UFT members. Even the Citizens Budget Commission (CBC), a conservative watchdog group has complained about it.
According to the CBC report there are 137,000 participants in the TDA (this includes CSA, DOE, and UFT) with 51,000 being retirees while only 3,000 of them are currently drawing income from the TDA. The 3,000 figure is hard to believe since most of the retirees I know either take a percentage of their TDA or annualized it. Furthermore, at 70.5 years of age the retirees must take the Required Minimum Distribution (RMD) from their TDA. I must assume they are talking about the TDA principal and not the total TDA amount.
Because the TDA fixed income option is giving participants an effective interest rate of 6% over present day inflation, its no wonder that 60% of all TDA funds are in the fixed income fund. Moreover, as of last year, the average TDA member had $325,000 socked away at retirement. At 7%, this generated a yearly return of $22,750 without touching the TDA principal. Quite a chunk of change to add to your average yearly pension of $45,000.
Combine the generous interest rate of 7% with the fact that for New York State residents, the TDA pays no State or City tax and the 7% windfall is effectively a tremendous tax haven to shelter income from the State and Local tax agencies. Moreover, since the TDA is tax deferred, no federal taxes are paid until you start withdrawing it at retirement and only that amount you actually withdraw or forced to by the RMD.
My recommendation is contribute to the TDA as much as possible as it reduces your taxable income, exempt from State and Local taxes on withdrawal if you reside in New York State, and take advantage of the 7% interest rate that the Fixed Income Fund gives you. in our low interest rate environment.