Under current tax laws, certain non-profit organizations, such as Bowling Green State University (BGSU), are allowed to offer all employees the opportunity to participate in a special arrangement known as a Tax-Deferred Annuity (TDA). This opportunity, spelled out in Section 403(b) of the federal tax code, means you may put aside money today to build income for retirement and get a tax break at the same time. All you have to do is save money in a TDA, a type of investment that is managed by either a mutual fund or an insurance company.

As you might expect, there are several hundred TDA investments available from mutual funds and insurance companies. In making TDA privileges available to you, BGSU wants to make sure you can choose from a wide range of investments to meet your individual needs.

The information that follows will tell you more about:

• How a TDA Works
• Why You May Need a TDA
• Why You May Not Need a TDA
• Factors to Consider When Choosing a TDA
• Decisions You Will Need to Make
• How to Join the TDA Program

How a TDA Works

When you participate in a TDA, you have a valuable way to defer, or postpone, your taxes while saving for retirement. To enjoy this important tax advantage, you agree to have BGSU take the amount you want to invest "off the top" of your pay and redirect it into a TDA account you select. In this way, the money goes into the TDA as pre-tax dollars. Since that money does not count as income for tax purposes, you do not pay federal or state income taxes on it now, but you do pay Bowling Green City taxes. Your W-2 income is reduced by the amount you save and you pay less in taxes.

Example:

• Your annual salary is $30,000
• You save $3,000 annually through the program
• Your federal and state income tax is based on $27,000, not $30,000
• This reduces the amount you pay in taxes

Compared to setting aside the same amount of money on an after-tax basis, the money you save in taxes will increase your disposable income. You will not have to pay taxes on TDA contributions, or on the investment return they earn, until you take that money out of your account. The chart below compares tax-deferred savings to after-tax savings (for example, through a savings account at a bank):

It is important to realize that a TDA not only offers a tax-effective way to invest a portion of your income, but such savings may accumulate to substantial sums through the years. Keep in mind, too, that contributing through a TDA only reduces your pay for income tax purposes. It does not affect how pay raises are calculated, your contributions to either the Public Employees Retirement System (PERS) or the State Teachers Retirement System (STRS) or any of your benefits that are based on pay. So your group life insurance and retirement plan benefits, for example, will still be based on your base pay before TDA contributions are taken out.

Why You May Need a TDA

Did you know that...
Although average life expectancy is in the 70s, many people live to age 90 or beyond. The President's Commission on Pension Policy suggests that you will probably need 70% or more of your final salary as income at retirement.

Why You May Not Need a TDA

Although the TDA is a great way to save for the future, you may have more immediate needs at the present. Because the purpose of the TDA is to allow you to set aside money for retirement, the regulations governing TDA's are very strict in order to prohibit them from being used as a savings account for most emergency financial needs. Be sure you have adequate savings to handle both routine and emergency financial needs before deciding to participate in a TDA.

Factors to Consider When Choosing a TDA

The TDA program allows you to decide how to invest your savings. The companies authorized to offer TDA's provide investments varying from conservative to balanced to more aggressive. Click here to see a list of the authorized companies. This allows you to select the right investments based on your individual objectives.

The investments you choose should be selected based on your goals and risk tolerance. To prepare to make the right investment choices, it's important to review some basic ideas about investing.

Risk vs. Return

Making investment choices involves comparing the potential for investment gains to the potential for investment loss. Generally, the higher the opportunity for gain, the greater the opportunity for loss.

The funds with the most risk may give you the most return over time; although from year to year (or quarter to quarter), you may see more dramatic ups and downs. Funds with less risk usually give you less return on your money over time. You probably won't see as dramatic a loss (or gain), but your money may not grow as quickly, either.

Decisions You Will Need to Make

If you take part in the TDA program, there are two key decisions you will need to make:

1. what TDA investment is best for you
2. how much to invest

Choosing a TDA Investment

Each company offering TDA's will provide you with information about the company and its products. As you will see, the available options cover a wide range of features, reflecting the fact that each employee has different financial goals. You have a choice between products offered by insurance companies and mutual funds.

An annuity contract between you and an insurance company generally provides for the accumulation of contributions during your working years and a guaranteed income for the remainder of your lifetime during retirement. The insurance company will guarantee your principal invested in the contract's fixed account, but not the separate (variable) accounts. The insurance companies and mutual funds offer a variety of variable accounts for investment.

How Much to Invest

Deciding how much to set aside toward retirement will depend on several factors, such as your individual goals, what you can afford, and the contribution limits set by the Internal Revenue Service (IRS). Again, be sure you have adequate financial reserves to cover your financial needs, including most emergencies, before deciding to participate in a TDA. The contribution limits are called the maximum exclusion allowance (MEA). They are different for each person, may change each calendar year, and involve complicated calculations. There is a calendar year (January 1 - December 31) limit which is determined by several formulas using information such as years-of-service, prior tax-deferred contributions, type of retirement plan, retirement plan contributions, salary, etc. The MEA is further limited by a cap of $10,500 or less depending on your salary and allowable calculated deductions per calendar year. The way this works is that each person who has less than 15 years of service with any public college or university may shelter the lesser of the MEA calculation amounts or the Internal Revenue Code Section 415 amount but not more than the maximum as defined by  law.

If you have more than 15 years of service at BGSU, there is a catch-up provision that may allow salary reduction contributions greater than the annual limit as previously explained.

Maximum Exclusion Allowance Limits

The MEA amounts include a General Limit and Alternative Limits. Employees of colleges, universities and hospitals have the option of using Alternative Limits, rather than the General Limit, which are referred to as Alternative A, B and C. The Alternative Limits may allow for a larger tax-deferral amount. Alternative A is available only when terminating or retiring and may be elected just once in a lifetime. Alternatives B and C are available in any calendar year. The IRS regulations state that once an Alternative Limit has been used, however, a different Alternative Limit may not be used in future years, even if you are employed by a different employer. In future years, you may use either up to the General Limit or up to the same Alternative Limit. The General Limit and the Alternative Limits are determined by formula calculations.

Your insurance or mutual fund agent has the ability to perform these calculations for you. It is important to have the calculations done each year so that you do not contribute more than the law allows. You should maintain a copy in your files in case an Audit is requested by the IRS. A copy of the exclusion calculation must also be attached to your BGSU Annuity Agreement.

How Your Retirement Plan Affects the MEA

Since you are in a defined benefit retirement plan, usually you will find your largest reduction possibility under Alternative C. Changes in salary or a change from full-time to part-time employment with your current employer, as well as other factors, can affect this for a particular year.

It is important to remember that many factors impact the calculation of the General Limit and the Alternative Limits. There is no way to know for sure which Alternative will provide you with the highest level of contribution in future years.

The "Special Catch-up" Provision

The Cost Of Living Adjustment of 1997 established a cap or limit on tax-deferred contributions that applies to the General Limit and the Alternative Limits. This may not necessarily be your maximum limit. An exception to this rule was made in the Act that applies to employees with at least 15 years or more of full-time employment with BGSU. This is called the "special catch-up" calculation and may be available if you: (a) have at least 15 years of full-time employment; and (b) are limited by an annual cap on tax-deferred contributions. There are complex restrictions that apply to the 15-year rule including a lifetime limit that does not allow more than a cumulative total of $15,000 to be sheltered in excess of the annual limit. This lifetime limit began accumulating as of January 1, 1987. The rule may allow for less than $15,000 depending on the total amount of prior tax- deferred contributions. It is essential that you keep track of both your total prior tax-deferred contributions since being employed with BGSU and the cumulative amount, if any, that you have sheltered in excess of $9,500 beginning with 1987 to 1998.

Flexible Spending Accounts

One of the factors used to determine the amount you may tax-defer is your taxable earnings. Your earnings for purposes of determining TDA contributions is reduced by any pre-tax contributions you make to your medical or dependent care Flexible Spending Account.

Staying Within Your Individual Limits

To know what your calendar year limit is, you must have a calculation done. Under the IRS regulations, you are responsible for compliance with the MEA and for ensuring that your salary reduction does not exceed the individual maximum allowed. The maximum amount may change each calendar year as the information factored into the formula changes (salary, years of employment, prior TDA contributions, prior retirement plan contributions, cumulative amount sheltered in excess of $9,500 beginning in 1987, etc.). As a service to employees, your TDA company will perform calculations upon request. If you need assistance, the Benefit's Office can refer you to a company representative who will assist you in completing the calculation. Participants should have a calculation performed each year.

How to Join the TDA Program

You may begin participation in the TDA program at any time. To participate, you must complete a form called a Salary Reduction Agreement that, in effect, reduces your taxable salary. The form is necessary to redirect before-tax dollars into the program. Listed below is information about how to start a TDA, effective dates and making changes:

Contact the Benefit's Office (phone 372-2114) for a list of approved companies. Contact the representative or company that you have selected from the list, and fill out an application form.

Your annuity company will assist you in the calculation of your maximum contribution limit. You should be prepared to provide appropriate information to the company so that the calculation can be done to ensure that your contribution does not exceed the legal limit. Your company will request from you the information they will need.

The BGSU Salary Reduction Agreement form must be completed once your account has been established/confirmed with the TDA company you have selected. A new agreement must be completed each time you make a change in the amount, changing companies or terminating an existing agreement. To make these changes, contact your TDA company.

The BGSU Agreement form must be received by the Benefit's Office at least 10 days prior to the pay date you wish the deduction to start.

Tax-Deferred Annuity: A Secure Future

The BGSU's TDA program offers an opportunity to save for tomorrow and get a tax break at the same time. With the wide range of funds to choose from, you should be able to find an investment product that meets your individual goals. No matter which type of TDA you choose, it will help you build a more secure future.

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