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.


58 comments:

Anonymous said...

100% of my TDA is in fixed, and always has been since my first year. I can take a risk with my own investments, where I have more choices and control.

ed notes online said...

Clarify this: 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 -- because it can be misleading. Not subject to tax until you start taking it out like any IRA and then you get hit - Assume 25% tax bracket -- thus if you have 100k in TDA it is really 75K. But it can be worse because when the money starts rolling in when you reach 71 and a half, it gets added to whatever income you have so it may push you into a higher bracket. A saving grace is that the first 20K you get is not taxed by the state. I'm not sure how that is affected in other states. The key is for people not to assume they have all that money at their disposal.
The UFT runs a session for all people when they reach 71 that is very useful. TDA is not a 401k but a 403 something which means if you have other distributions coming you can't mix and match. If you had another 403 which pays a lower interest rate you can take your distribution from there and allow the TDA to grow.

Anonymous said...

This is great.
In New York City
TDA is treated as a pension no city or state tax.
457 city and state tax only on the first 20,000.
Roth IRA or IRA.
Pension. No city and state tax
Social Security I believe he from reading from Chaz
No city and state tax .
Teachers are in good shape .
RMD 70 1/2 or 72 from reading of Chaz did it pass.
Thinking about how much my expenses will be in the future
And how much my money is worth.
For example every 10 years by TDA doubles while
In 20 years my money Worth half .
Now I have to think of an exit strategy
so I pay minimum tax, when I retire.
Please correct above if any errors and please add on so I can learn more.
Thank you


Anon2323 said...

Nice article, you mentioned if you divide 72/7 every 10 years 2 months the TDA account doubles? So if I have 150,000 in TDA in 2 years TDA will jump to 300,000? Let's say you leave DOE at 45 years old would the TDA double again at 55? If thats the case be nice to know could have 600,000-700,000 in TDA at 55.

Anonymous said...

Thanks for your thoughts. It makes me feel more confident with my investing decisions.

Anonymous said...

Great article. Sorry to switch topics but can someone tell me is next Tuesday, Sept 3rd
considered a staff development day or a regular Tuesday? I just need to know if I get out at 2:50pm or 3:40pm. Thank you for your help.

federalresumeguide said...

What a fascinating math indeed. So I will receive $ 135,000 in the Fixed Income Fund and $ 141,000 in the TDA's equity fund, respectively.
The only question that worries me is which fund Mr. Randi Wiengarten would use himself. Oh yes, and how could I work as a teacher for 30 years to save such an amount of money.

Anonymous said...

Please explain to me not compounded .
How is the interest accumulated Heli .
Thank you

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Anonymous said...

Chaz I am 45 315000 in fixed the rest 7% yearly at variable A should I move everything to fixed?
should I not wait to the market goes back higher? please advise

Greg Linn said...

That all sounds interesting, but for at least the last few years, the stock market has vastly eclipsed the returns of the fixed income arm of TDA. Historically, the average return, leaving money in equities over a 5-10 year period, is about 7%/yr. And while you miss the market downturns in a fixed income fund, you also miss the upturns. Put another way, I've greatly outperformed the fixed income fund in the last 4-5 years and I'm glad I put all my money in equities.

Chaz said...

Anon 1:45

I would try to max out the TDA by 100% fixed and take extra money and put it into the City's 457 equity Roth fund to account for future inflation

kenny said...

Based on the interest rate of 7% money will double every 10 years. So if you have $300,000 at the age of 45 and don’t put another penny into it it will be 600,000 at the age of 55 . The power of compounding can make you rich

Anonymous said...

Haaaaa! How many NEW teachers are gonna be able to retire at age 61? The new tier is a joke. Most newbies plain out are telling me that the DOE is just a stepping stone on their way to Westchester or Long Island.

Anonymous said...

As Anon 10:47 said, I would also like to know about "TDA 7% interest not being compounded."
How can I calculate the expected amount?

Chaz said...

Except that the 7% is not compounded.

kenny said...

what do you mean its not compounded? its 7% interest per year... im confused

Anonymous said...

What happens to your money in tda if you get a job in the suburbs? I would think it would benefit a teacher to not switch over their retirement from NYC to NYS for as long as allowed. Is this correct? The NYC TDA fixed is vastly superior to 403b choices.

Chaz said...

The 7% dividend is simple interest and unlike banks is only adjusted once a year.

Anonymous said...

So would it be correct in assuming that if you did want to switch from fixed to variable A you should wait until after OCTOBER to ensure you get the adjustment to fixed?

Anonymous said...

Where does it say that simple interest vs compounding? That is a massive difference.

Chaz said...

Figure it out yourself by going on TRS online and you will see the 7% dividend is not compounded.

Anonymous said...

Can you make it simple for me
If i were to retire with 1 million in my fixed tda
can i receive 70,000 a year in interest for the rest of my life and not touch the principal?
im not sure how its all added up after you stop contributing?

Anonymous said...

Are you sure it's not just compounded monthly? I'm 100% in fixed and the interest each month keeps increasing and it's been doing that for years. I don't see how it can be simple interest if it keeps going up.

Anonymous said...

I agree with 546.....Im in fixed, and my total increases more in a month than I'm contributing.

Chaz said...

Your're both wrong. The 7% dividend is only adjusted once a year for the pricipal in the TDA.

Anonymous said...

Chaz is correct. The 7% dividend is NOT COMPOUNDED.

JayC said...

The TDA 7% interest rate is PAID to your account at year end, 12/31. This is annual compounding, not simple interest.
The amount you see as interest each month in your TDA is the accrued interest you have EARNED, but that will not be paid to your account until year end, 12/31.
The earned accrued interest is mostly 7% of the prior year's 12/31 balance, plus a much smaller amount of 7% of each month's TDA contributions.

Anonymous said...

From the Motley Fool:

What Is the Difference Between Simple Interest vs. Compound Interest?

Here's what you need to know about the two ways of calculating interest.
Motley Fool Staff (the_motley_fool)


Updated: Mar 27, 2019 at 2:04PM

Published: Jan 12, 2016 at 12:07AM

There are two different ways of calculating interest -- simple and compound. Here's how to calculate each, as well as the key differences and similarities between the two.

Simple interest
Simple interest is well, simple. Each year, the interest is calculated as a percentage of the principal



So if you borrow $1,000 at 7% simple interest for five years, you'll owe $350 in interest.

Compound interest
In the real world, simple interest is rarely used. When you deposit money into an interest-bearing account, or take out a line of credit, the interest that accumulates is added to the principal, and the next interest calculation is done on both the principal and the interest.

Interest can be compounded at any interval, but the most common compounding intervals are

Annual: once per year.
Quarterly: four times per year
Monthly: 12 times per year
Weekly: 52 times per year
Daily: 365 times per year

Similarities and differences
While both types of interest will grow your money over time, there is a big difference between the two. Specifically, simple interest is only paid on principal, while compound interest is paid on the principal plus all of the interest that has previously been earned.

My understanding is TDA is compounded annually, not daily, monthly or quarterly like most banks which pay a much lower rate.

So if you have $100,000 and get 7%, you end up with $107,000 at the end of the year.

The next year, do you start off at $107,000 as principal, or $100,000?

I am assuming you stop contributions for this easy example.Please clarify.

Anonymous said...

That interest link comes up blank

Anonymous said...

So how many years does it take to double? At 7% compunding, it would be roughly 10 years.

Anonymous said...

So do we ever get interest on the interest?

Chaz said...

Assuming no further contributions it will be $107,00 and then the next year it would be $107,000 times 7%.

Anonymous said...

If you back-calculate the numbers listed on the below link, 7% interest IS compound. (interest on interest). Isn't it?

https://www.trsnyc.org/memberportal/WebContent/investments/powerCompounding.aspx

Anonymous said...

At 330K, for 21 years, no further contributions, just interest...Compounding...1.3M. Simple...815K. Wow. Huge difference.

Anonymous said...

Of course investments in the TDA reap the annual benefits of compounding 7% interest- that is an absolute no brainer.

(Only way to avoid it [and nobody wants to] would be to yank out 7% each and every year right after receiving the annual 7% and that weird maneuver would be essentially impossible prior to retirement in any case. )

Anonymous said...

Chaz please talk talk about how do we take out our funds out of our retirement accounts
So we can minimize our taxes. For example which one show which offers my TDA ,my
457 , investments Bank accounts , Roth IRA or IRA.
Thank you in advance

Anonymous said...

It's annual compounding. Thanks for clarifying and slightly changing the post I think.

retired teacher said...

to 7:27 - I have several friends who left the city for jobs on the island. You can transfer the NYC TDA to the NY state pension system of the district you are in but you cannot add to the NYC TDA.

Shady said...

I can never forget the day that Bloomberg and Klein patted our young lad, Randy from the Wine Gardens, on his head in a press conference. I said to myself our young boy, Randi, just sold us out and got patted on his head. I still see Randi from time to time. He has an apartment in the city. We never speak. I just look at him wondering how was he ever my president? How did he represent my interest? He sold us out on many levels. We can't even grieve a file letter any more even if it is total BS. Thank you, Randi.

Anonymous said...

Tda fixed is definitely compounding. Not sure how anyone could say different. Chaz, please correct yourself so people don't go around spouting false information and getting ridiculed.

Anonymous said...

I think the confusion is between principal and total contributions....I am retired. My cumulative total contributions to the TDA were a shade under $500K. My TDA balance is currently a little over a million dollars and the interest I earned in the past year was a bit over $70K (not 35K). I think the principal every year is what is in your account--between the interest you have earned and the total contributions. I also moved my money between funds before permanently moving them to fixed several years ago. Yes, we do get compound interest--annually? I am not sure of that as I could not find anything that specifically said that on the TRS website (which doesn't mean it isn't there), but your money will compound and you will get interest on past interest earned.

So to the person who asked if you have a million dollars in your TDA--will you earn 70K in interest per year...yes, you will earn something in that neighborhood.

Anonymous said...

Shady,
Randi was the paramour of Sandra Feldman, that’s how she became president of the UFT. Her bribe from Bloomberg made her president of the AFT.

Anonymous said...

you see interest every month because its a fraction of the 7 % I think. so say you are a million dollar tda person who lets say for math purposes gets 72000 a year in interest, you would see your Tda increase by 18000 per quarter?

Anonymous said...

2:58 pm
The interest paid seems to be based on whatever the balance was on January 1, I believe. My first and second quarter interest were the same....so yes, my TDA increased by approximately 18K per quarter.

My guess is that they take whatever the total amount I have in my TDA (let's say on January 1--that includes all past interest and whatever I contributed) and they calculate the interest for the year based on that amount. So the extra 50K I earn by quarter 3 doesn't accrue interest this year...it will start getting interest next year. I could be off with exact dates as to when the interest is calculated, but you will see your money compound yearly....is quarterly or monthly interest compounding better? Hell, yes...but this is what we have.

What sucks is that we get 7 percent while CSA members still get 8.25 percent. The UFT really sold us out.

anonymous said...

Can you please Chaz explain the compounding on the TDA fixed rate
I am newly retired
Thank you

anonymous said...

Isn’t the 7% interest added each month and then that new principal amount gets 7% interest too
Isn’t that compounding ? Please clarify I am confused thanks Chaz

anonymous said...

So 12/31 we should see a big jump in the principal ? Please clarify

anonymous said...

Which would you get from TDA ? The Simple at 815k ?
Correct ? I am confused

anonymous said...

Did it take the 10 years for it to double to $1million wow kudos to you
Do you have to start taking out the interest ? Will the principal go down or still continues to grow the 7%
How old are you ? Near 70 mark
Thanks just trying to clarify

Chaz said...

You get the increase once a year and the 7% is based on the principal

anonymous said...

So that money is not in your TDA account until after 12/31/19 , you will see a big chunk in January 2020 ?

anonymous said...

With the RMD does that happen every year after you turn 70.5 years old
Will the remaining principal money continue to grow 7%
Thank you

Unknown said...

Does it make a difference when you take the RMD (lets say October vs. December) on how much interest will accrue on the TDA account the following year?

Chaz said...

Probably very little since the 2 months is less than #5,000.

Anonymous said...

According to info here. https://www.tax.ny.gov/pdf/advisory_opinions/income/a02_9i.pdf NYC teachers do not pay NYS taxes on TDA withdrawals. I cannot find a second source to verify. Can anyone else?

Chaz said...

The TDA is treated as a pension and pays no NYS or NYC taxes.

Anonymous said...


The Tax Scandal That Will Not Quit: The State of New York continues to treat the 403(b) Plan of the Teachers’ Retirement System of the City of New York as a “pension plan of local government”. This treatment places TRS 403(b) distributions in the same 100 percent tax-exempt boat as a pension from the TRS Qualified Pension Plan. See: Department of Taxation and Finance Publication 36 p.12 March 2015.

Examples:

1. Michael has $1,000,000 in his 403(b) account. At age 63 Michael retires and begins to collect his $75,000 pension from the New York State Teachers’ Retirement System (NYSTRS). The NYSTRS does not have a 403(b) plan so Michael’s 403(b) account is with the Vanguard Group of Mutual Funds. Michael distributes $60,000 annually from his Vanguard 403(b) account.

Michael’s $75,000 pension is 100 percent exempt from
New York State tax and the first $20,000 of Michael’s
$60,000 distribution from his Vanguard 403(b) account
is, also, exempt from New York State tax. $40,000,
representing the balance of the $60,000 distribution, is
taxed by New York State. Michael is in full compliance
with the tax laws of the State of New York.

2. Mary, also, has $1,000,000 in her 403(b) account. At age 63 Mary, also, retires and begins to collect her $75,000 pension from the Teachers’ Retirement System of the City of New York (TRS). Mary, also, distributes $60,000 annually from her TRS 403(b) account.

Mary’s pension is 100 percent exempt from New York
State tax and contrary to law, Mary’s distribution of
$60,000 from her TRS 403(b) account is, also, 100
percent exempt from New York State tax.

The TRS 403(b) Plan began in 1970 and has been, historically, referred to as the “Tax Deferred Annuity” or “TDA”. Treating TRS 403(b) distributions as tax exempt income changes TRS 403(b) contributions from being tax deferred to being tax-free. There is no such thing as a tax-free retirement plan. How could such a colossal violation of New York State tax law persist for decades? Who is watching the store?

RESULT: Mary has paid no New York State tax on her TRS 403(b) contributions nor on the profits those contributions have generated and will continue to generate. Moreover, she will pay no New York State tax on her 403(b distributions.

Q.: How many tax dollars were never collected by the State of New York? J.F.

A.: I will leave the answer to the New York State Department of Taxation and Finance.

If I was Michael I would be screaming from the rooftops------what say you?