Retirement Lesson Plan

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​Deferred compensation plans are exactly what the name implies, an

account established by your employer in which an amount that you

choose is held out of your paycheck and deposited into a trust

account on your behalf. The amount that goes into the account is

considered compensation that was not paid to you but instead is

“deferred compensation.” This is different from most retirement

accounts in that you don’t own a “Tax-qualified account”; rather,

you simply elected to have a portion of your salary held by your

employer in an account to use at a later date.

Since all deferred money must remain the property of the employer

or the trust the employer established for the plan, the employer is the

sole owner of the assets. In a governmental plan (including public schools), the assets are protected from the claims of the employers’ creditors. But in a 457(b) plan established by a 501(c) 3 tax-exempt employer, assets aren’t protected. While most people don’t consider this to be a great risk, risk does exist.

An important advantage of the 457 account is that it allows those who separate from service before reaching normal retirement age to withdraw without the 10% tax penalty imposed on IRAs, TSAs and most other retirement accounts. If you’ve separated from service and take a withdrawal from your 457 account, you’ll pay only ordinary income tax regardless of age. This can be a substantial benefit to those in the public sector, who tend to retire in their early 50s.

Contributions for 2014-2015; Over age 50 $ 6,000 Catch-Up Provision* Under age 50 $18,000 *The 457 has a special catch-up limit the IRS calls Special Section 457(b) Catch-Up, aka the three-year catch-up or double-down limit. If you are within three years of retirement and have under contributed, you may be eligible to make these Double Limit Catch-Up contributions in each of the three calendar years before your normal retirement age. Another big opportunity for those who want to maximize the amount they save for retirement is that since December 31, 2001, the contribution limits under IRC Section 457 no longer need to be coordinated with the limits on the elective deferrals. This means that if your employer offers both TSA and deferred-comp plans, you can contribute the maximum to both plans.

Loans:Like the 403(b) accounts the IRS does allow for loans, but the school districts can still deny the loan option or put minimum or maximum loan amount restrictions according to their plan document.

Unforeseeable Emergency: An unforeseeable emergency is defined as:

·Severe financial hardship to the participant resulting from an illness or accident suffered by the participant, a spouse, a dependent, or a designated beneficiary

·A loss of the participant’s property due to casualty

·Other similar extraordinary and unforeseeable circumstances caused by events beyond the participant’s control

Distributions: Because of an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay income taxes or penalties relating to the withdrawal). Distributions may not be made to the extent the emergency may be relieved through reimbursement from insurance or otherwise, by liquidation of the participant’s assets (to the extent liquidation would not itself cause severe financial hardship), or by cessation of deferrals to the plan.

IRS regulations provide the following examples of an “unforeseeable emergency:”

·The need to pay medical expenses, including non-refundable deductibles and The cost of prescription drugs, for the participant, a spouse, a dependent, or a designated beneficiary

·The cost of rebuilding a home following damage not covered by home-owner’s insurance (for example, following a natural disaster)

·The imminent foreclosure or eviction from the participant’s principal residence

·The need to pay funeral expenses of a spouse, dependent, or plan beneficiary

The purchase of a home and the payment of college tuition are generally not unforeseeable emergencies.