Financial Planning - Voluntary Payroll Reduction Plans

Voluntary Payroll Reduction Plans - 403-b (TSA), 401-k or 457

Q.1 What are the advantages of a TSA (403-b)?

A.1 1) No current income taxation on the deferred amount, except it is included in the Social Security base, and 2) earnings on the accumulating funds are not taxed until they are distributed.

Q.2 Who should consider not contributing to a TSA?

A.2 The member in the 15% Federal tax bracket or the member that may need the money short- term.Single members with a taxable income under $30,650 and married members filing jointly with a taxable income under $61,300 are in the 15% federal tax bracket. Roth IRA's are preferable.

Q.3. How much can I contribute?

A.3. For calendar year 2007, a member can contribute 100% of their compensation up to $15,000 into a 403-b and/or a 457 plan. Members age 50 or older can contribute an additional $5,000. A member age 50 or older having both a 403-b and a 457 plan available to them could shelter $40,000. 401-k plans (spouses) have similar limits. In addition, further "catch-up" may be possible.

Q.4 What are my choices at retirement?

A.4 1) Lump Sum Withdrawal: Fully taxable as ordinary income unless transferred into another qualified plan. 2) Monthly Payments Through Annuitization: The insurance company will guarantee payments for life under a variety of annuity options. Remember: An inflationary economy deflates the value of future fixed payments. 3) Periodic Withdrawals: You are sent periodic amounts based upon your requests. Minimum distributions are calculated upon reaching age 70 ½.

Q.5 When is a distribution required?

A.5 Beginning April 1 of the calendar year after the taxpayer becomes 70½, he/she must start to withdraw any money that was deposited and earned since 12/31/86. The withdrawal is spread out over the life expectancy of taxpayer or the joint life expectancy of taxpayer and spouse combined.

Q.6 What is the penalty for early withdrawals?

A.6 There is a 10% IRS penalty for withdrawing money before age 59½ UNLESS there is a disability, death, retirement after reaching age 55, or part of a series of substantially equal periodic payments made for the life or joint lives of the employee and beneficiary.

Q.7 What may the funds be invested in?

A.7 1) Fixed Annuities: An insurance company guarantees both the principal and a minimum rate of return. 2) Variable Annuities: Rate of return fluctuates based on performance of investment choice. 3) Mutual Funds

Q.8 How do I choose a TSA product?

A.8 Choose an offering with the lowest costs, no withdrawal penalties, and a variety of fixed and variable investment options. Generally, you should avoid offerings of life insurance compannies because of higher fees and penalties.