Current Pension Topics
Deferred Compensation Options

By JOEL L. FRANK

Q.: As you know, the Deferred Compensation Plan offers a pre-tax 401(k) as well as a Roth 401(k). How much can I contribute to each? Which one is better?

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

P.A.

A.: With the pre-tax 401(k), you do not pay current income tax on the contribution. The contribution is made with gross or pre-tax dollars. With the Roth 401(k), you do pay current income tax on the contribution, with the investment return being tax-deferred. If you are sure you will be in a lower tax bracket during retirement, you should invest only in the pre-tax account.

If you feel you will be in a higher bracket, then the Roth account is for you.

If you are like most and simply do not know what bracket you will be in during retirement, you may want to hedge your bet and invest in both. For 2008, the maximum contribution you can make into either account is $15,500 if you are younger than 50, and $20,500 if you are 50 or older. If you contribute to both, the combined contribution cannot exceed the preceding amounts.

The average participant of the Deferred Compensation 457(b) Plan has not contributed as much as the rules allow over a career of service. (Reality dictates that costs for food, clothing and shelter come first.) Such "underutilized contributions," however, are not lost; they may be tapped by making special contributions under a provision of the plan known as Deferral Acceleration for Retirement (DAR). This is the catch-up provision of Section 457(b) of the Internal Revenue Code. I implore you to use up as much of your "underutilized contributions" as you can afford. Please contact me if you believe you cannot afford to contribute under DAR. Below is a detailed description of DAR taken from the Plan's Web site:

Deferral Acceleration for Retirement (Catch-Up Provision)

Deferral Acceleration for Retirement (DAR) is a "catch-up" provision for the 457 Plan. Participants who have not contributed the maximum amount to the 457 Plan in previous years have an opportunity to make up for underutilized contributions prior to retirement through the DAR program.

DAR allows qualifying participants to contribute funds above the annual maximum to the Plan, the total of which cannot exceed twice the applicable annual contribution amount (regular contributions plus DAR contributions) for three consecutive calendar years. Please note that the "age 50 and older" additional contribution amount may not be used during the three years a participant is using the regular 457 catch-up provision. The "age 50 and older" additional contribution cannot be classified as an underutilized contribution for DAR purposes either.

DAR can be elected in the three years before the participant's designated Normal Retirement Age (NRA), which is any age in the range of years beginning when a participant may retire and receive full pension benefits up until age 70-1/2. If a participant is not in a pension system, NRA may be any age between age 65 and 70-1/2.

If a participant did not join the 457 Plan as soon as he/she became eligible to join, or if he/she did not contribute the maximum amount each year, he/she has underutilized contributions. Uniformed and Managerial employees are eligible to "catch-up" for underutilized contributions dating as far back as 1986, as long as they were employed with the city for the years for which they wish to catch up. Similarly, civilian employees are eligible to "catch-up" on underutilized contributions dating as far back as 1987.

Participants may contact the Plan's Administrative Office at (212) 306-7760 and request an analysis of his/her past contributions, should the participant have any question about whether he/she has underutilized contributions.

DAR cannot be used more than once. Participants who qualify for DAR are allowed a one-time use of the provision that will enable them to "catch up" on past-underutilized contributions over three consecutive years.

DAR Contributions

Unlike regular 457 Plan contributions, which are a percentage of weekly or bi-weekly gross compensation, DAR contributions are a fixed dollar amount per check. So, for example, if he/she wants to contribute $7,500 through DAR in 10 paychecks, he/she can do so by submitting a request to contribute exactly $750 per check for 10 consecutive paychecks. A participant's per-check DAR deduction amount must not exceed the adjusted gross income, otherwise no DAR deduction will occur.

A participant may choose to begin DAR deductions at any point during a calendar year. However, partial participation (starting mid-year) is counted as one full calendar year. For example: If DAR deductions begin in June, DAR can be used for seven months (June through December) in that calendar year. These seven months will be counted as the first year of the three consecutive calendar years of DAR.

DAR deferrals, which are invested in the same manner as the account's investment allocation, may be changed or stopped by the participant at any time. Changes to a DAR deferral amount will take effect approximately 30 days from the date a DAR form is submitted to the Plan.

Although DAR is based on underutilized contributions from previous Plan years, current participation in DAR will only affect taxes in the year DAR is used and previous years' W-2s will NOT be retroactively adjusted to reflect current DAR contributions.

How does a participant begin making DAR deferrals? A participant must complete a DAR form which can be printed from our Web site. The form must be submitted to the Plan's Administrative Office at 40 Rector Street, 3rd Floor, New York, New York 10006. Office hours are 9:00 a.m. to 5:00 p.m., Monday through Friday.