Current Pension Topics

Better Option Than '403' Loan

By JOEL L. FRANK

Q.: I was told by a friend not to take out a loan against my 403(b) account because this entails double taxation. Is this true?

P.A.

A.: No, it is false. A "loan" from your 403(b) account (or any other pre-tax account) is simply a tax-free withdrawal of pre-tax dollars. The "loan" is paid back with after-tax dollars to offset the withdrawal of pre-tax dollars.

One should not "borrow" from a pre-tax account, however, because this results in less money in the account growing for you. Even if you pay back the loan(s), your account balance at retirement will be smaller than it otherwise would be. Example: $50,000 403(b) account balance is reduced to $30,000 because account holder took out a "loan" of $20,000. Thirty thousand dollars is subject to investment growth, not $50,000.

Members of the Teachers' Retirement System of the City of New York and the New York City Employees' Retirement System may apply for a loan directly from their retirement system just as if the retirement system was a bank. The interest rate is quite favorable and, more importantly, their Annuity Savings account balance is not reduced by the amount of the loan. Example: A Tier 1-2 member earns 8.25 percent on his/her Annuity Savings Account balance of $50,000. The member borrows $20,000 from the retirement system. The Annuity Savings Account balance remains at $50,000 and continues to earn 8.25-percent interest.

Q.: I am a Tier 2 member of the Teachers' Retirement System of the City of New York. My annuity contributions are guaranteed to earn 8.25-percent interest until June 30, 2009. Insofar as bank interest rates are way less than 8.25 percent, I would like to transfer $50,000 from my bank savings account to my Annuity Savings account with the TRS. Would this be allowed?

J.F.

A.: Such a deposit is not allowed. There is, however, another way to accomplish your objective. The law allows you to increase your Certified Annuity Savings rate to a rate of your own choosing. In order to take full advantage of the 8.25- percent guaranteed interest rate, just voluntarily increase your contribution rate to your Annuity Savings Account. Elect a rate (you decide) greater than your Certified Rate and pay your Social Security tax separately. "QPP Contributions Change Application" is form IP1 and can be downloaded from the TRS Web site.

Of Note: The TRS and NYCERS charge their Tier 1-2 members 6-percent interest on loans but credits their Annuity Savings account balances with 8.25-percent interest. Are you listening, Governor Pataki? Please let me know if you know of a bank that charges less interest on loans than it credits to a savings account holder.

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.