TAX SHELTERED INVESTMENT

Transcription

1 TAX SHELTERED INVESTMENT INFORMATION FOR EMPLOYEES PERSONNEL MANAGEMENT AND SERVICES OFFICE OF RISK AND BENEFITS MANAGEMENT

2 DADE COUNTY SCHOOL BOARD Ms. Perla Tabares-Hantman, Chair Dr. Michael M. Krop, Vice Chair Mr. G. Holmes Braddock Dr. Robert B. Ingram Ms. Betsy H. Kaplan Mrs. Manty Sabatés Morse Mr. Demetrio Pérez, Jr., M.S. Dr. Marta Pérez Dr. Solomon C. Stinson Roger C. Cuevas

3 Superintendent of Schools

4 TABLE OF CONTENTS Glossary of Terms... i General Information... 1 Permissible Transactions... 2 Types of products offered... 4 Things to know about a TSA plan... 6 Questions you should ask... 7 Summary... 9

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6 GLOSSARY Company Active Company De-activated Company Designated Agent Annuity Rate Guaranteed Rate Surrender Charge Credit Risk A Life Insurance Company or a Broker/Dealer Company A company that has the ability to initiate all transactions. The agent(s) can start new annuitants; re-start existing inactive annuitants; increase or decrease existing annuitant contributions; transfer and/or exchange existing annuitant contributions. The agent of the company has the ability to initiate only transactions that increase and or decrease the contributions of existing participants. The responsible party who has been selected by an officer of the company to be the controlling party for all transactions and activities of the company's agents selling products to the Board's employees. The rate of interest which a company will pay out should the annuitant choose an option that distributes the accumulated values over time. This is the rate of interest that the company guarantees to pay as an absolute minimum return on an investment. This is the rate of interest actually earned on the funds invested when the employee's participation ends. The risk that the company holding your money will not pay the interest or dividends owed, or the principal amount when it falls due. i

7 Market Risk Inflation Risk Maximum Sales Load on Purchases Sales Load on Re-Invested Dividends Contingent Deferred Sales Charges Exchange Fees Management Fees The risk that the value (share price) on your investment will decline. The risk that the dollar you get when you sell an investment will buy less than the dollar that you invested. The commission or sales charge some funds levy when you buy shares. The legal maximum sales load is 8.5% of the amount invested. The sales charge imposed when you automatically Reinvest dividends paid by the fund in additional fund shares. Also called deferred sales loads back-end loads redemption fees and exit fees. Administrative fees when you switch money from one fund to another in the same fund group. These are paid to the company that manages the fund s investments as compensation for its services. 12b-1 Fees This a Securities and Exchange Commission regulation that lets funds use some of their shareholders money each year to pay certain marketing expenses. Other Expenses These include legal and accounting fees, printing and posting costs, custodian and transfer agent fees and other fund expenses. ii

8 In 1961 the United States Congress enacted law which permits employees of a public school system to participate, on a voluntary basis, in a tax sheltered investment plan. The program is available to all employees of the School Board of Dade County, Florida. The School Board of Dade County neither suggests that an employee should or should not participate in this program. The decision of whether or not to participate rests with each employee individually. The Board desires that the principal points of the program be clearly communicated to public school employees. An informed employee will be in a better position to make an intelligent decision. Participation in a tax sheltered investment plan is fully voluntary and does not, in any manner, affect participation in the Florida Retirement System. It must be understood that a tax sheltered investment plan is a means for the systematic accumulation of funds for supplemental retirement purposes and long range savings on a tax deferred basis. Money is set aside regularly during years of employment and it is returned or repaid at the time the employee attains age 59 1/2, separates from service, dies, becomes disabled or suffers financial hardship. Although the money that is set aside through payroll reductions is not considered to be current taxable income and therefore not taxed, it does appear on the employee's W-2 form. Since the money is reduced from the employee's salary through regular payroll reductions, withholding taxes are also reduced. The funds invested are considered to be taxable as ordinary income at the time they are withdrawn or paid back. Even though a distribution may be permitted under hardship or separation from service it may nonetheless be subject to a 10% surtax (in addition to the income tax) as a penalty for premature distribution. This general description does not mean that every public school employee should participate in the program. Each employee's situation is different, and the advantages in one case might prove to be disadvantageous in another case. However, small amounts invested will grow over time. 1 tsa@sbab.dade.k12.fl.us

9 In order to START a TSA for an employee, a complete application, consisting of the following: 1. A signed Amendment to Employment Contract. 2. A Control form. 3. A certified Maximum Exclusion Allowance Form. 4. A copy of the Company's Application Form and. 5. A Uniform Disclosure Proposal. These forms must be submitted all at once on behalf of the employee by the agent or company representative. In order to change the amount contributed on an existing TSA, all of the above forms are required except a copy of the company's Application form. After receipt of the application, a verification letter is sent to the employee stating the company name, the bi-weekly contribution amount and the effective date of the first payroll reduction. The application is processed for the specific paydate unless the employee withdraws the application during that time period by signing and returning the verification letter to the Office of Risk and Benefits Management. At this point, the transaction is official and the contract remains in effect continuously unless canceled or until a change in payroll status occurs. The employee can terminate his/her payroll reductions by signing and submitting a tax sheltered investment plan cancellation form. Forms are available from the Office of Risk and Benefits Management. Your salary reduction can commence at any time during the year according to cut-off dates available to all qualified companies. Changes in amount of payroll reduction for a tax sheltered investment plan can be accomplished TWICE during a calendar year. You can change (start, restart, increase or decrease) the amount of a payroll reduction at any time as long as there are no more than two changes in amount of reduction during a calendar year. At any time, you can cancel the contributions by contacting the Office of Risk and Benefits Management, obtain and fill out a cancellation form. Board rules also permit an employee to purchase tax sheltered investment plans with two different companies simultaneously, provided that applicable Internal Revenue Service rules are not violated. 2 tsa@sbab.dade.k12.fl.us

10 An employee can "transfer" his/her current payroll reductions from an existing insurance company to another plan offered by another qualified company at any time according to cutoff dates available to the agents of qualified companies. This can only be done TWICE a calendar year. The employee can also "exchange" the cash values of an existing contract for the cash values of another contract issued by another qualified company. CAUTION: When the cash values of one contract are exchanged for the cash values of another contract, the company from which you are terminating the first contract will levy its surrender/withdrawal penalty on the invested funds. This penalty reduces the amount of funds that can be rolled over to another qualified program. This can also be done only TWICE a calendar year. The application for this type of transaction consists of: 1. A signed Addendum to the Amendment to Employment Contract; 2. A Control Form; 3. A Uniform Disclosure Proposal - All Applications; 4. A new Company Application Form; 5. A certified Maximum Exclusion Allowance Form. These transactions may or may not be to an employee's advantage. STUDY YOUR UNIFORM DISCLOSURE PROPOSAL CAREFULLY! In case of an exchange and/or transfer, a notice will be sent to the representative of the company offering your existing tax sheltered contract. It is your responsibility to be informed of your rights and/or potential losses if you proceed with this type of transaction. 3 tsa@sbab.dade.k12.fl.us

11 Some of the things you should know about tax sheltered investment plans, are included in this document. Presently, you may choose from a group of three different annuity plans accepted by the Internal Revenue Service as conforming to law: 1. The Fixed Annuity The employee's money, along with the money of others, is invested in an insurance company's general account. A company's general account is commonly invested in corporate stock, corporate and government bonds, real estate and real estate mortgages as well as commercial paper. Interest is earned at a guaranteed rate and is credited to your under your contract. At the time of retirement, your investment, plus earned interest, or dividends, is paid to you on a periodic basis (usually monthly) for life. Payments remain at a fixed amount, are guaranteed, and you cannot outlive them. This plan accumulates cash values so that if you d i e before retirement, your beneficiary would receive a benefit equal to the cash value or the sum of the premiums paid, whichever is larger. If the contract is surrendered before maturity you would collect the cash value, subject to applicable surrender penalties and income taxes. 2. The Variable Annuity This type of annuity is similar in concept to the fixed annuity except that your money us invested in an equity portfolio, (separate account), managed by the company issuing the annuity contract to their designated account manager. The employee may be able to determine which types of investments they want to participate in depending on the degree of risk they want to take. The basic theory is to relate the value of the annuity to the equity markets and reflect any gain or loss in the account value or periodic payments to the annuitant. Theoretically, the insurance company expects your contractual share, and resultant payments, to keep pace with economic fluctuations. You can accordingly receive varying amounts of monthly income, higher in some months and lower in others. In effect you are taking a risk of loss, as well as providing yourself with an opportunity for gain, because the amount of the cash value is not guaranteed. If a lifetime income is selected at maturity, a minimum periodic payment is guaranteed, however, the current payment may vary with the performance of the separate account. 3. The Mutual Fund This type of fund is technically called Investment Companies. Your money is 4 tsa@sbab.dade.k12.fl.us

12 pooled with the money of other people and used to buy any of a wide variety of tradeable securities, usually stocks, bonds and other money market instruments. Investors will own shares in the fund proportionate to the amount invested. Each share represents ownership of part of the fund s underlying securities. The price per share is based on the current value of the fund s holdings. There is some risk of loss in providing yourself with an opportunity for gain because the amount of the payments and cash value are not guaranteed. Unlike an annuity contract, a mutual fund cannot guarantee a return. Mutual funds reference information can be found in Morningstar Mutual Fund Sourcebook, the Wiesenberger Investment Company Service and Standard & Poor s/lipper Mutual Fund Profiles. These contain essential information about hundreds of funds, summarizing investment objectives, fees, sales loads, dividend history and performance over various time periods. 4. The Annuity Including Incidental Life and Disability Insurance--Retirement Income Policies This type of plan is similar to the fixed annuity in that payments at retirement remain at a fixed amount, are guaranteed, and you cannot outlive them. If you die before retirement, however, your beneficiary would receive the cash value of the annuity, or the face amount of the life insurance (whichever is larger). Life insurance benefits (exceeding the cash value) come to the beneficiary income tax free, but the portion of salary reduction representing the premium for the life insurance is taxable income, and this will be reported to you for inclusion on your income tax return each year. The disability waiver of premium benefit provides that the insurance company will continue premium deposits in the event of disability lasting six months or longer. 5 tsa@sbab.dade.k12.fl.us

13 Your decision as to which type of plan is most suitable for your financial needs should be based on, at the very least, the following points: 1. Your own investment philosophy. 2. Your retirement objectives and needs. 3. Your present and anticipated income situation and your present and anticipated needs. 4. Your need for life insurance as part of an investment plan. 5. The fact that the Board already provides you with life insurance. The maximum annual contribution which you are permitted to make for purposes of tax sheltered investment plan, is determined by a Maximum Exclusion Formula established by law. A close approximation of the amount, which can be allocated for annuity purposes on a tax deductible basis, is approximately percent of income. However, the application of the formula will in some cases produce a higher amounts depending on the specific circumstance. IT IS UP TO YOU AND YOUR AGENT OR COMPANY REPRESENTATIVE to determine the maximum amount based on the information available from your pay stub and any other applicable source of data. A salary reduction, authorized by you, will be processed by the Office of Risk and Benefits Management, and payments forwarded on a regular basis to the company. It is emphasized at this point that each employee must determine for himself or herself: 1. Whether to participate at all. 2. The amount of money to be invested in a tax sheltered investment plan. 3. The type of contract desired. 4. The company from which the contract is to be purchased. Throughout this discussion, the program has been referred to as a "tax sheltered" program. The tax advantages (for all types of plans) are as follows: 1. That portion of your salary reducted for premium payments is not subject to current Federal Income Tax (except for the premium for Incidental Life and/or Disability Insurance). This means, in effect, that your includable compensation for income tax purposes is reduced 6 tsa@sbab.dade.k12.fl.us

14 and accordingly, your current tax liability is reduced. This rule applies each year you participate in the plan. 2. Increase in value of your investment is not subject to current federal income tax. For example, as your surrender value accumulates and exceeds your combined payments, the added increment or appreciated value is not subject to current taxation. 3. The income you receive at the time of retirement or at any time you make any withdrawals is taxable. The foregoing points concerning the principal tax advantages are based on existing law. Future changes in the tax laws and tax rates, advantageous or otherwise, may conceivably occur. Whatever type of contract is purchased, it is recommended that questions in the following areas be asked, at the very least: 1. What is the Company's current A. M. Best Rating? 2. What is the Company's Standard and Poor's Rating? 3. What is the Company's Moody's Rating? 4. What is the Company's Duff and Phelp's Rating? (Investors may wish to consider those companies that are highly rated by at least two evaluators [that is getting one of their three top grades] and that also aren't rated below the fourth grade of any of these established ratings. If a company's rating is "NR", that company was not rated by that specific rating service.) 5. Ask about your company's financial solvency. (There are many financial yardsticks that measure the company's ability to stay in business in the face of financial adversity; Capitalization Ratio, Risk Adjusted Capital Ratio, etc., to name a few) 6. How much money can be put into this plan? (Most programs have some minimum contribution level, and all contributions are subject to the Maximum Exclusion Allowance) 7. How can the monies be taken out? (Monies can only be taken out under specific IRS guidelines: Death; Disability; Separation from service; Attains age 591/2; Financial Hardship. Ask you agent to explain in detail under which circumstances you are allowed to withdraw funds from the plan.) 8. What is the guaranteed minimum interest rate? 9. What is the current interest rate on new money going into the plan? 10. What is the current interest on old money (money that has 7 tsa@sbab.dade.k12.fl.us

15 already been invested into the plan)? (Many companies distinguish between monies already invested [old money] in the program and current contributions [new money]. Separate interest rates will be associated with old money and it may differ significantly from the interest rate on new money.) 11. What is the current surrender rate of interest? (surrender charge is applicable if you to make a withdrawal [generally greater than the free withdrawal percentage] before the contract matures/ 12. What is the surrender charge? (Penalty for withdrawing accumulated funds from the program or for transferring invested funds from the company to another company) 13 Is the fixed annuity plan being offered a Two-tiered product? Two-tired annuity products have a higher interest rate credited to the authorization/accumulation value and a lower interest rate credited to the Cash/Surrender Value. The difference between these rates of interest can be significant. Other types of twotiered products have surrender charges that are in effect for excessive periods of time [greater than 10 years]) 14. When does the surrender charge disappear? ("As a rule, the surrender charges disappear within 5-10 years after the contract is issued", Best's Retirement Income Guide, 1990 Volume II. An analysis of Retirement Annuities, October If you plan to be in the program for a short period of time, an excessive surrender charge can make a significant difference in the value of your investment.) 15. Are there any penalties to be paid when accumulated funds are rolled over/exchanged from one plan to another, one company to another? (When the cash values of one contract are rolled over to another contract, a surrender penalty may be levied on the funds by the issuer of the first contract. This penalty reduces the amount of funds that can be rolled over) 17. Does the plan offer a loan provision? 18. What is the interest rate charged on borrowed funds? 18. What is the interest rate credited to the plan on the value of the funds borrowed. 19. What is the interest rate credited to the plan on the balance of funds? When a loan is taken, the previously stated interest rates may change to reflect lower earnings on borrowed funds and on the remaining balance of funds) 20. Are there any other charges? If so, please explain. 21. Examine the table of guaranteed cash values. At what year does your proposed contract show the break-even point? 22. How often can a change in the amount contributed be made? (Many of the options you are allowed to make are limited to one change per calendar year [Start, Increase, or Decrease) 23. How often can a change in the amount contributed be made? (The number of changes you are allowed to make are limited to one change per calendar year 8 tsa@sbab.dade.k12.fl.us

16 [Start, Increase or Decrease] 24. Can the plan be stopped at any time? (You may cancel your contributions at any time. Thirty days notice must be given before the cancellation takes effect.) 25. What is the penalty is the plan is stopped? 26. What are your transferability or conversion rights in event of change of place of employment, etc.? 27. What other guarantees exist under the policy? 28. Do the premiums per unit of retirement income compare favorably with those of other companies? The Uniform Disclosure Proposal, provided by the company sales representative, gives you a tool that should be used to compare products offered by different companies. Shop around until you are comfortable with the comparative research you have done and then select the best product that meets your needs. Save your Uniform Disclosure Proposal for comparison purposes should you later wish to transfer and/or exchange your contract. The opportunity afforded through this program, for an employee to accumulate additional retirement income with the accompanying tax savings is unique and may be financially advantageous for many participants. This advantage, however, can be rendered of little or no consequence if an employee is not in a position to afford the required expenditure. Each employee must examine his or her own situation on an individual basis -- in other words, the decision is each employee's sole responsibility. REMEMBER THAT THIS IS AN INVESTMENT SITUATION, NOT A SAVINGS PLAN. You should probably not participate unless you intend to keep the money in the plan or plans until retirement. 9 tsa@sbab.dade.k12.fl.us