Current Pension Topics

Increase Deferred Comp Funds

By JOEL L. FRANK

As we embark on the second half of 2006, it may be a good time to review your tax liability for the current year. You may find it advantageous at this time to increase your contributions to your favorite deferred-compensation account, 457(b), 401(k), 403(b), IRA. Before the end of the year, the Deferred Compensation Board will be offering an IRA (Individual Retirement Account). It should, ideally, have a Roth feature because, unlike the Roth 401(k), a Roth IRA is not subject to Required Minimum Distributions starting at age 70-1/2. Distributions from a Roth IRA do not have to be made until death. Stay tuned. I have often been asked which pre-tax arrangement is best. In my opinion, the 457(b) account is best because withdrawals (at any age) are not subject to the 10percent penalty tax.

The earliest date upon which tax-free withdrawals may be made from a Roth 401(k) is upon reaching age 59-1/2 provided the account has been in existence for at least five years. The oldest a person can be, upon opening up the account, in order to make tax-free withdrawals at age 59-1/2 is, therefore, 54-1/2. If you opened up the account at age 60, you have to wait 5 years, until age 65, before you qualify for tax-free withdrawals.

Remember that for 2006, if you are at least 50 years old, you can contribute a maximum of $40,000. This is accomplished by (1) Contributing $20,000 to your 457(b) and $20,000 to your 401(k) accounts; or (2) Contributing $20,000 to your 457(b) and $20,000 to your 403(b) accounts. Contributions to a 401(k) and 403(b) in the same year are aggregated at $20,000. This means if you contribute $20,000 to one, you may not contribute at all to the other. If you contribute $14,000 to one, you may not contribute more than $6,000 to the other. Also, contributions to a pretax 401(k) and an after-tax Roth 401(k) in the same year are aggregated. So if you contribute $20,000 to one you may not contribute at all to the other. If you contribute $12,000 to one, you may not contribute more than $8,000 to the other. These amounts assume the investor is at least 50 years old.

If you have underutilized your 457(b) contribution limits, the law provides for a catch-up. You first must adopt a Normal Retirement Age (NRA). An NRA is any age you choose between the earliest age upon which you may retire with unreduced benefits and age 70-1/2 or an older age if you are still working past age 70-1/2. Assume age 62 is the earliest age you may retire with unreduced benefits as well as the age you plan to retire. 62 is, therefore, your NRA. The 457(b) catchup provision, formally known as the Deferral Acceleration for Retirement (DAR), allows you to double the regular maximum contribution in each of the three years prior to the year you reach age 62, your NRA. So if you want to take full advantage of the DAR and will turn 62 in 2010, you must start your DAR contributions on Jan. 1, 2007, because a DAR contribution is not permitted in the year you retire. For 2006, the DAR is $30,000 ($15,000 x 2). You may not take advantage of DAR and the "age 50 and older" additional contribution in the same year. 401(k) and 403(b) plans do not have the DAR. This is another reason for making the 457(b) your primary pre-tax retirement investment account.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.