‘Additional Contributions’ to WRS

By Bob Moeller
WEAC Member Benefits

April 2006

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Achieving Financial Independence

A combination of factors leads me to explore an investment available to members which I have never discussed before.

First, you may have seen some columnists indicating that a straight life immediate pay-out annuity may be of interest to some people. Second, you are well aware that interest rates are quite low right now. That means those annuities will have low pay-outs. Finally, I knew that the Wisconsin Retirement System (WRS) allowed you to make "additional contributions" but I had never spent a lot of time analyzing the advisability of you making additional contributions.

I have had individual appointments with literally thousands of members and very rarely do I ever see on their retirement statements any indication of an additional deposit. So I researched it and met with staff from the Employee Trust Fund (ETF).

Here's the deal:

You may make either before-tax, 403-b tax-sheltered annuity contributions (if your school district has it on their approved list), or after-tax contributions where you simply mail in a check or take it directly to the ETF. I do not recommend the 403-b method since your investments each month will not earn anything until the following January.

The after-tax contributions also do not earn interest until beginning the following January, but of course you eliminate that problem by not sending in your money until December. Contributions must be received before December 31 (postmarks don't count) and should include your Social Security number and note that the check is an additional contribution.

You may contribute large sums. ETF has a simple form for you to easily figure the exact limit, but for most members the allowed contribution will be more than $30,000 a year. Your contribution limits are based on your earned salary, so retirees cannot participate.

Beginning the next January 1, your money will be invested just as your retirement assets are, i.e. fixed or half fixed and half variable. They will receive the same earnings credits your retirement amounts receive. Again, unless you are retiring this year, don't contribute until December.

You may not take out or transfer the money until you quit employment. Once you quit or retire, you may withdraw the funds in the form of lifetime annuity options similar to those you have in your regular retirement, or you can take a "period certain" annuity where you simply get back your money over a period of years selected by you (between five years and 15 years along with an assumed 5% interest credit).

Notably, even in the "period certain" annuities, you get any increases or decreases in amount that is granted to your regular pension annuity. However, the fixed annuity amount cannot ever go below the initial amount, the same as with your regular pension.

You can:

1. Start your additional contributions annuity at the same time as your regular annuity, or
2. Delay it up to age 70? if you like. If you delay it, the future annuity will have to be sufficient to meet the ETF minimum amount ($149.01 for 2006). Otherwise you will get the money in a lump sum, or
3. Withdraw the money in a lump sum, paying taxes on your earnings, or
4. Roll over the earnings amount into a regular IRA and get what you invested back with no additional taxes on it.

Not bad. Can you invest money in April 2006 and immediately begin an annuity in June 2006 when you retire? Yes.

The lifetime annuities are based on the money purchase method the ETF uses for people your age. Samples of "period certain" annuities for a $10,000 investment are as follows:

• Period 10 years, $105.50 per month for 120 months, total $12,660, plus future adjustments.
• Period 15 years, $78.50 per month for 180 months, total $14,130, plus future adjustments.

Remember, if the regular pension gets an increase you will also get that increase. My research shows that the initial rates here are higher than those offered by insurance companies, and no insurance company gives you increases later unless you take a much lower rate to start. You can check out insurance company rates at www.immediateannuities.com.

In summary, if you want a conservative way to increase your eventual pension from the ETF, an additional contribution here is much better than trying to buy additional income from a regular immediate annuity purchased from any life insurance company. Also, if you want a simple, good investment with after-tax dollars and you've done your Roth IRA contributions to the maximum, this is a good option. You can further check out details by going to the ETF Web site at www.etf.wi.gov and viewing the "additional contributions" information.

My sincere thanks to Linda Owen and Sari King of ETF for educating me about "additional contribution" possibilities.

Posted March 24, 2006