Tax-Deferred Annuity: What are your options?

This is our last column of the school year and we wish you a well-deserved restful summer.

We spent much of this year being subjected to well-orchestrated attacks by a coalition of right-wing political ideologues, selfish billionaires and greedy corporations who do not think that teachers and other public employees deserve a modest standard of living. We have survived these attacks because of the UFT’s efforts to build support from the parents of our students, leaders of the faith-based community, a united labor movement and the general good feelings of the New York City students that we have taught and helped succeed over the years. The fight is not nearly over, but with all UFTers’ efforts we will overcome.

The last several “Secure Your Future” columns dealt with issues that retiring members have to consider. One important issue is how we deal at retirement with what for most of us is our largest fiscal asset: the Tax-Deferred Annuity.

Over the years, we have contributed to our Tax-Deferred Annuity accounts and they have grown by the investment returns they have earned in the six Teachers’ Retirement System’s Passport Funds. During the period we were saving, we took advantage of two important federal income tax provisions. We deferred taxes on the money we contributed during our career and we also deferred the taxes on our investment gains. We will pay these taxes when we use the money after retirement.

Look at your last Tax-Deferred Annuity statement. Did you ever imagine when you started teaching that you could accumulate such a sum? Now you have to decide what to do with this money now that you are retiring. Let us help.

You have two choices:

1. You can remove the money from the Teachers’ Retirement System.
2. You can continue to leave the money with the Teachers’ Retirement System.

We will discuss some aspects of either choice. Before you make your decision, you must carefully weigh your choices.

Remove the Tax-Deferred Annuity

If you remove the Tax-Deferred Annuity you have two choices:

1. You should strongly consider spending some of the money — you deserve something special for all the good work you did. Remember, however, the money you use has never been taxed and will be taxed by the federal government and maybe taxed by your state (check the tax rules for the state in which you live).
2. You can reinvest the money in another tax-favored account such as an Individual Retirement Account, commonly known as an IRA. Before you make the decision to do this, you must decide where you want the Teachers’ Retirement System to send your money. Do not have the Teachers’ Retirement System make a withdrawal check payable to you! If the Teachers’ Retirement System makes a check payable to you, it must withhold federal income tax and this creates unnecessary complications.

A bit of advice: Do not look to make new friends in the investment field at this time in your life. There are many competent financial experts who can help you make investment decisions, but there are also vendors of financial products who will look to benefit themselves and not you.

If you ask, the UFT will send you guidelines on how to select a financial planner. NYSUT, your state union, also may be helpful in selecting a financial planner. Call NYSUT benefits at 1-800-626-8101.

Leave the Tax-Deferred Annuity

Your other alternative is to leave your Tax-Deferred Annuity with the Teachers’ Retirement System. If you do so, you have two choices. One is to do a Tax-Deferred Annuity deferral. If you defer your Tax-Deferred Annuity, you continue to invest it at the Teachers’ Retirement System. You can invest in any of the six investment choices and your account is treated exactly as it was while you were in-service.

You continue to have on file an up-to-date designation of beneficiary form to protect your heirs and beneficiaries. You can make quarterly investment changes. You retain the right to remove your Tax-Deferred Annuity at any time. You can make partial withdrawals if you choose to.

When you reach age 70½, the Internal Revenue Service requires you to begin taking Required Minimum Distributions. When you take a Required Minimum Distribution, you have to pay federal income taxes on your withdrawals. Again, check with your state tax authority on any state or local income taxes due.

Your second choice if you leave the money with Teachers’ Retirement System is to annuitize it. When you annuitize your Tax-Deferred Annuity, you exchange your Tax-Deferred Annuity lump sum for a lifetime stream of payments that can never run out as long as you live.

Just like with your pension, you can provide for heirs and beneficiaries when you annuitize. The amount of the annuity check each month depends on the size of your Tax-Deferred Annuity account, the investment results, your age and whether you provided for survivors. The checks that you receive are federally taxable and, again, check the tax laws in your state to see what might be due.

We hope we have provided you food for thought on what to do with your Tax-Deferred Annuity at retirement.

If you took advantage of all of the UFT’s retirement-related services, we are sure you will have a retirement which goes beyond mere financial security.

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Summer pension services

The UFT will have pension consultants available for telephone inquiries from 10 a.m. to 5 p.m. Monday through Thursday in the central office. Please call 1-212-598-9536 for retired members or 1-212-598-6866 for active members, or 1-212-777-7500 for general information.

In-person consultations will be available only in cases that need immediate attention such as members approved for disability retirement. Full service in the borough offices will begin in the fall when school reopens.

Teachers’ Retirement System hours are 8:30 a.m. to 5 p.m. Monday to Friday. The phone number is 1-888-8NYCTRS. If you visit the office, be sure to have proof of identification with you.

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Investment changes

Tax-Deferred Annuity investment election changes that you want to begin as of the October-to-December period must be applied for before Sept. 1.