Current Pension Topics:
Knowing What to Invest In

By JOEL L. FRANK

Q.: I am a beginning Teacher who wants to start saving for retirement. I have begun researching on the Internet about salary reduction plans but just ended up more confused than I started! I have about $100 to invest each month and 30-40 years (yikes!) until retirement. Which plan is my best option? Or should I do an IRA? I am married and my husband has a 401k he has maxed out on.

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 .

L.M.

A.: Should you choose a salary reduction plan (403b/457(b)/401(k)), traditional IRA or Roth IRA? It depends. One factor will be taxes. With the salary reduction plan and traditional IRA, you will be deferring taxes on the contributions and profits now in exchange for paying taxes on withdrawals later. With the Roth IRA you pay taxes on the contribution now and do not pay taxes on earnings (profits/interest) later. So one consideration is your current tax rate and your expected future tax rate. A second factor is how much can be contributed to these schemes. You stated that you plan to contribute $100 per month ($1,200 a year) and your husband maxed out his 401(k), which is $15,500 per year. Has your husband also contributed to an IRA, would your husband like and be able to contribute additional funds for retirement, and would your husband contribute to an IRA on your behalf? Also, did you or your husband contribute to a traditional or Roth IRA in 2007?

If your husband would like to contribute additional funds, he may be able to set up an IRA for himself for 2007 and 2008 and contribute funds to an IRA on your behalf for 2007 and 2008.

Here are some facts to consider in making your decision:

The contribution limit to a traditional IRA for 2008 is the smaller of the following amounts: $5,000, or your taxable compensation for the year.

For 2008, because you are covered by the Teachers Retirement System (state or city) your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:

- More than $85,000 but less than $105,000 for a married couple filing a joint return;

- More than $53,000 but less than $63,000 for a head of household, or: - Less than $100,000 for a married individual filing a separate return.

Roth IRA contribution limit: If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2008 will generally be the lesser of: $5,000, or your taxable compensation for the year.

Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than: $166,000 for married filing jointly, $114,000 for head of household, or married filing separately and you did not live with your spouse at any time during the year, and $100,000 for married filing separately and you lived with your spouse at any time during the year.

If you are employed as a Teacher outside of the city, I urge you to use the Deferred Compensation 457(b) Plan of the State of New York as your salary reduction plan and the Vanguard Group of Mutual Funds for your IRA (traditional and Roth) investing. Invest in the appropriate Target Date fund.

Of Note: There are all too many school districts and local governments in the state that have not opted into the state's Deferred Compensation 457(b) Plan. Shame on you! I urge all school districts and local governments to do so as soon as possible. All of the state's public employees (state and local) should have access to a voluntary pre-tax retirement savings plan that is low-cost and superbly managed by state government. Because state law allows local governments to opt into the state administered 457(b) Plan no local school district or other local government needs to have its own commissioned based 457(b) plan. Any local government that offers such a high-priced plan is breaching its fiduciary duty to its employees. Just like the basic retirement benefit is derived by a statewide plan so should be the voluntary pre-tax 457(b) plan.

If you are employed as a city Teacher, I urge you to use the Deferred Compensation Plan of the City of New York for all of your investment needs. This plan offers you pre-tax investing via its 457(b) and 401(k) plans. You can contribute to both at the same time for a combined maximum of $31,000 for 2008. Additionally, the plan offers a Roth 401(k) feature as well as a traditional IRA and Roth IRA.