Meeting at the BTU on Wednesday, June 7, from 4-6

A new IRS ruling has made it easier to shelter your severance pay using either a 403.B (Tax-Sheltered Annuity) Plan or a 457 Plan. The new ruling allows this tax-sheltering device to be used up to 2 ½ months after completion of service. Formerly, the contribution had to be completed prior to service departure.

Your severance currently is divided into two parts, and you will only be able to shelter, if you wish, the first half of your severance pay, which will be paid to you on or about 9/15/06 , according to current plans. The 2 nd half of your severance will be paid in 2007, prior to 12/31/07, in accordance with a long-standing contract provision.

Teachers, nurses and paras who wish to do so may shelter the first half of their severance pay subject to individual IRS (calendar 2006) limits currently in place, taking into account what contributions you have made to date this year, if any.

Why shelter your severance? To postpone paying both federal and state income taxes on the amount received. Although you will eventually pay both state and federal taxes on the amount ‘sheltered,' you may be in a lesser tax bracket at the time you make the withdrawal. When withdrawn, the contribution and any income or growth it has generated will be taxed as income using the tax rates in effect at that time. Another reason to shelter or defer part of your severance is that the contribution (or deferral amount) will grow tax-deferred, i.e., you will not have to pay yearly taxes on the growth or income the contribution earns. You may shelter your severance using either of the common savings vehicles available to Boston teachers - a 403B or a 457 plan. Both plans accept pre-tax deferrals and allow the employee a range of savings options. You may use your current plan, subject to IRS-deferral limits, or open a plan of the other type. There is an essential difference in the plans: In a 403B, you choose the vendor (insurance company or mutual find company) and there are 40 or so to choose from; in a 457, the homework is done for you, as the state has awarded the administrative part of the contract to ING, although there are no ING funds as part of the core offerings. 

The state also monitors the operation of the plan. For more information on ING, see www.mass-smart.com or http://www6.ingretirementplans.com/SponsorExtranet/Mass/ if you wish. Other than this difference the plans operate essentially the same way.

Both income deferral and tax-deferred yearly growth are tax-advantaged benefits to you, but it not the intent of this piece to give individual financial advice. Nor is it the intent to suggest that any particular retiring member of the BTU take advantage of this program, ING or any particular 403b company. That is a personal decision for each to make after consultation with a financial professional. The purpose of this memo is to announce that the BTU is setting up a meeting with ING, the company awarded the state's 457 plan. The 457 Plan is also known as the Mass Deferred Compensation SMART Plan.

The Deferred Comp Plan, also known as a 457 Plan, works essentially similarly to a 403B or a TSA. Teachers, Nurses (others, too), and Paras are allowed to contribute to either or both. Deferral limits for each are cumulative and contribution to one does not interfere with a contribution to the other.

Why did we invite only ING to the meeting? There is only one 457 plan for Mass and city of Boston employees, while there are 40 plus 403b companies and literally hundreds of salespeople for the 40 firms. It was easier to set up the meeting this way. What's more, the details were not ironed out until last Friday. If you want to set up the severance deduction with any of the 40 companies or with your particular representative, you are encouraged to do so. Do not wait until the meeting on June 7 to do so.

We invited ING for one other practical reason: Many people have a 403B Plan, and they may be unable to make any further contributions to that plan for this calendar year. They may need to find another savings vehicle to shelter their severance, and as the plans do not interfere with each other, they may have no choice but to set up a 457 Plan.

(The meeting is for ING only, which is the sole city vendor for the 457 plan. No other company will be allowed to speak or hand out literature inside the union hall, though we do not object to anyone else coming to the meeting.)

Again, this memo is not meant to offer financial advice. You are strongly advised to seek the help of a financial professional before taking any of the steps outlined above.

Richard Stutman
President
Boston Teachers Union