Tuesday, August 27, 2019
Why The TDA's Fixed Income Fund Is So Popular
One of the best perks New York City teacher,s have is the Tax Deferred Annuity (TDA) , Due to a quirk in New York State tax law, the TDA is treated as a public pension and is not subject to State and Local taxes which can be as high as 13% for most teachers who live in New York City and 7% for teachers living outside New York City. This perk has become even more important since we now have a SALT limitation of $10,000 that can be deducted on our income tax for people who don't take the standard deduction.
The most popular fund in the TDA is the Fixed Income Fund which pays market based rates by guaranteeing a 7% dividend regardless of how the stock market does. The only negative is that the 7% is not monthly compounded but is adjusted once a year in December to account for any changes in the TDA principal in the Fixed Income Fund (annual adjustment) You can get a higher return if you annuitize the TDA but that means losing control of your TDA funds and is not recommended here.
Most participants in the TDA select the Fixed Income Fund to place their contributions in. The latest data showed that70% of all TDA contributions were in the Fixed Income Fund and who can blame then?
an analysis by Financial Planner, Neil Frank of the Chief showed that if a teacher put in $100 monthly in the Fixed Income Fund for the last 30 years, that teacher would have amassed $135,089 in their TDA. However, if the teacher put alll his or her money in the TDA's equity funds the amount would be $140,947. The difference by taking a risk with the ups and downs of the equity market is only 4.3%. For non UFT members like school administrators who receive 8.25% and that resulting in them receiving $147,696 or 4.8% above the educator who put all their money in the TDA's equity funds. You can thank UFT ex President Randi Wiengarten for the TDA dividend being reduced from 8.25% to 7% for UFT members.
The age-old investment principle that those who take on greater risk are rewarded with greater returns has no application to this TDA Plan; at least for the past 30 years.
All teachers should strongly consider putting the bulk of their TDA contributions into the Fixed Income Fund and to account for inflation, buying equity funds outside the TDA..
Note: Here is how TRS calculates the interest for the Fixed Income Fund. Notice it's based on an annual 7% dividend.