With tax documents arriving in the mail and while finances are on the brain, it’s a good time to review a valuable resource you should take advantage of: the Tax-Deferred Annuity program.

The TDA is a supplementary investment program offered to UFT members by the city’s Teachers’ Retirement System. A TDA allows you to defer paying taxes on a portion of your wages and save for retirement at the same time

“But why do I need that?” I can hear you asking. “I have a pension and Social Security.” That’s true. And the union fought hard to get you that pension as well as Social Security, which originally was not available to public employees. (And still is not available to teachers in about 15 states!)

The classic model for financial security in retirement is the “three-legged stool.” Legs one and two are a defined benefit pension and Social Security. The third leg is personal savings, and that’s where the TDA comes in. It’s an optional tax-deferred savings plan open to all TRS members and, frankly, the sooner you begin contributing, the better off you’ll be financially.

In general, tax-deferred investment vehicles lower your current tax bill because you do not pay taxes on the money you put away, or the interest it earns, until you receive it when you retire.

The TDA provides:

• Flexibility: Six diverse investment options, including one fixed return fund.
• Convenience: Contributions are automatically deducted from your paycheck.
• Loan availability: You may borrow from your TDA before retirement.
• Online access: Manage your account on the TRS website.

More than 75,000 in-service UFT members participate, and if you’re not one of them, you’re missing out.

Managing a TDA in retirement

So now that you’re retiring, what happens to your TDA? You can move the money from TRS or you can leave the money with TRS.

If you take your money out of TRS:

1. You can spend some or all of it. You’ll have to pay federal taxes on your withdrawal, and perhaps state taxes depending on where you live.
2. You can invest the money in another tax-favored account such as an Individual Retirement Account, or transfer the money to another 403(b) program. If this is your choice, make sure you set up the account prior to withdrawing the money. Do not ask TRS to send a check made payable to you. TRS will have to withhold federal income tax, and this creates unnecessary complications.
3. You can invest the money in any type of investment vehicle. Again, make sure you understand the tax ramifications of this transaction.

Keep your money with TRS

Your other alternative is to leave your TDA with TRS. You have two choices:

1. You may maintain your account and avoid paying taxes on your money until you make a withdrawal. (You no longer may contribute to this program, however.) You can make quarterly investment changes. You retain the right to remove your TDA at any time. You can make partial withdrawals if you choose to do so. At age 70½, the IRS requires you to begin taking Required Minimum Distributions. In all probability, you will have taxes to pay.
2. You can annuitize the amount of money you have in your TDA and receive a second monthly retirement allowance. This means exchanging the total amount of money you have in your TDA for a monthly payment for the rest of your life. The amount of these monthly payments depends on the size of your TDA account, your age and whether you plan to provide for a survivor. You will owe federal taxes, and other taxes may be due as well.