Current Pension Topics
Roth Plan Myths and Realities

By JOEL L. FRANK

Here are more details about the new NYCE Roth IRA. The following information comes from the Deferred Comp Web site at: http://prod2.moneytree.com/nyceira/RothIRA.aspx .  

Mr. Frank is a fee-only Retirement Financial Planner and a retired NYC High School Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .

The NYCE Roth IRA

Withdrawal Rules and Benefits. The Roth IRA is a type of tax-favored retirement account. Unlike the traditional IRA, the contributions themselves are not tax-deductible. You need to have the account at least five years, and reach the age of 59-1/2, before you withdraw money. However, after that, withdrawals are tax-free, including all growth.

Rollover/Conversion Possibilities. The NYCE Roth IRA is the perfect instrument in which to roll your Roth 401(k). And you can convert your pre-tax NYC DCP 457 or 401(k) accounts to a Roth IRA at distribution.

An Ideal Estate Planning Tool. With the Roth 401(k), you must begin distributions at age 70-1/2 at a rate that is intended to pay out the total amount over your lifetime. However, if you roll over to the NYCE Roth IRA, there is no requirement to make withdrawals. You can leave your money in the account to continue growing tax-free until you need it. If you don't use it yourself, you can pass it on to your heirs.

Contribution Income Limitations. If you are single or head of household, your ability to contribute to a Roth IRA begins to phase out when your Modified Adjusted Gross Income reaches $95,000. If you are married, filing jointly, the phase-out begins when your joint Modified AGI reaches $150,000.

Some Common Myths About Employer Plans

MYTH: You're safer if you take your money out of an employer plan.

It's true that some private-sector 401(k) plans are heavily invested in the company's own stock; if the company's fortunes decline, so does the retirement of its employees. In contrast, the New York City Deferred Compensation Plan has options diversified across many different investments.

JF Comment: Moreover, it is impossible for a governmental entity like the city to sell shares of ownership in itself.

MYTH: You have more options outside an employer's plan.

In fact, the Deferred Compensation Plan offers an enormous range of investment options with over 11,000 mutual funds through a self-directed brokerage account.

MYTH: Your financial advisor can do a better job outside the plan.

Maybe. But make sure you're getting a fair comparison. The NYCE IRA funds have investment results which are published and audited. In addition, the NYC Plans have very low fees and expenses. Does your advisor?

JF Comment: Most "advisors" are not fiduciaries. Because they are commissioned salespeople, they need not place your interests ahead of their own. If you need an adviser, hire one that you pay directly (fee-only).

MYTH: Your account assets could be seized by the city's creditors.

Like the Deferred Compensation Plan, your NYCE IRA cannot be seized by the city's creditors - even in case of bankruptcy.

JF Comment: This is so because the investments are not titled in the name of the city. They are owned by a retirement Trust and, therefore, may only be used solely for your and your beneficiaries' exclusive benefit.

Be Cautious With Annuities.

An annuity is a contract you make with an insurance company. In exchange for a lump sum of money now, they agree to provide you with regular income payments in the future. These payments are meant to protect you from the possibility that you will outlive your money.

Annuities are complex investment products and should be approached with caution. Because annuities are contracts, they can be written quite differently from one company to another, making them hard to compare. Know what you're buying.

Annuities can have high costs. You immediately give up around 5 percent for the insurance company's commission just to own the annuity. Then there are expenses averaging over 2 percent every year. There can be surrender fees if you withdraw money too early - on average over 6 percent.

Annuities are generally not appropriate in an IRA. One of the primary benefits of an annuity is that it provides tax-deferred growth. Since investments in an IRA are already tax-deferred, an annuity does not provide you with any additional value, while retaining higher costs.

Finally, if you have a pension plan, you may already be receiving monthly payments that will not run out. In addition, your Deferred Compensation account can be structured to pay out over your life expectancy, as well.

JF Comment: I would urge you to contact me if you are considering the purchase of an annuity.