Your employer is probably offering a plan that allows you to supplement your savings for retirement and other financial goals.

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1 How Supplemental Plans Can Increase Your Savings Your employer is probably offering a plan that allows you to supplement your savings for retirement and other financial goals. The media talks about it all the time Americans simply do not save enough money. For many people, even the combination of employer retirement plan contributions and personal IRA savings are not enough to accumulate sufficient savings. But there is a plan that lets you reduce your taxes yearly as you save money tax deferred until you withdraw it. It s a supplemental retirement plan (SRP) and it comes in three common forms: 403(b), 401(k) and Public 457(b). Their unusual numerical names refer to the Internal Revenue Code (IRC) sections that govern them. (The table at the end of this article provides a comparative summary of these plans.) As creatures of the IRC, SRPs represent the government s way of encouraging you to voluntarily save more for tomorrow. They re voluntary because while the government created SRPs with certain tax advantages, it s entirely up to you to contribute to them. Generally, you may be eligible to contribute to your SRP immediately upon employment, which means you can begin saving additional money right away. In some SRPs, you may even get a matching contribution from your employer. How Your SRP Works Basically, you enroll in your SRP by completing both an application form and a salary reduction agreement. These forms authorize your employer to reduce your salary each payday as you contribute a portion of your salary on a pretax basis to your SRP account. (You can later change your contribution amount if you need to.) Once enrolled, you decide where to allocate your contributions among the available investment options. (For an idea of TIAA-CREF allocation options that may be available through your SRP plan, visit our Fund Research site at However, your employer may offer fewer or more allocation choices than those listed, including those provided through TIAA-CREF s Brokerage Services. You can learn more about TIAA-CREF Brokerage Services at All your SRP contributions, and any earnings, will grow tax deferred until you start withdrawing them. Withdrawals are generally restricted until retirement or after age 59½, when you ll pay ordinary income taxes on the money. If you take a distribution before age 59½, it may be subject to an additional 10% tax penalty. (A review of several other flexible SRP distribution options begins in the Withdrawing Your Money section, on page 2.) 1

2 If you die during your working years, your accumulations are paid to your designated beneficiary(ies). If you re married, your spouse may automatically become your designated beneficiary, but some public 403(b) and government plans have different requirements. So, if your SRP is subject to this requirement, and if you want someone other than your spouse as your beneficiary, your spouse must sign a waiver acknowledging this decision in the presence of a Notary Public or a plan representative. Save On Current Taxes Saving in your SRP is simple, and the tax advantages of doing so can be significant. Remember, your employer makes your contributions directly to your SRP account before you pay taxes. As a result, each SRP contribution reduces your current taxable income. To illustrate, if you re in the 28% federal income tax bracket and your contribution for the year is $15,000, the actual cost would be $10,800, netting you current tax savings of $4,200. If you take into account state and local taxes, if any, your actual tax savings could be higher. Use the Power of Compounding Returns Consider contributing to your SRP as much as you can as soon as you can. The combination of time and compounding interest (or investment earnings) can make a big difference in your retirement nest egg. Albert Einstein once called compounding interest one of humanity s greatest inventions and you ll see why from the following examples. Let s say Bob is 40 years old and wants to retire at age 62. He has no SRP savings (and we ll ignore any money he may have in his employer s retirement plan). If Bob contributes $15,000 per year for 22 years and earns a net average annual return of 6% 1, by age 62 his SRP accumulation would be worth $671,850 more than double his $330,000 total contributions. If Bob started these contributions at age 32, he d have 30 years of savings. What would the additional eight years of $15,000 per year at a 6% net average annual return mean to him? By age 62 he d have $1,224,071. Think about this: An additional $120,000 over eight years mushrooms Bob s total savings from $671,850 to $1,224,071. Take one more example. Say Bob didn t wait until age 40 or 32 to begin saving and started at age 25. Again, he ll retire at 62, but in this scenario Bob saves $7,500 per year rather than $15,000, while earning the same 6% net average annual return. He ll contribute a 1 The assumed rate is purely hypothetical and is not intended to predict the actual performance of any specific investment. An investment s principal value and total return will fluctuate. Withdrawals of retirement account earnings are subject to ordinary income tax. A federal 10% tax penalty may apply to withdrawals made before age 59½. 2

3 total of $277,500, less than in either previous scenario, but at age 62 he d have $985,256 a few thousand dollars short of $1 million. Not bad at all. These hypothetical examples illustrate how time and compounding returns can combine to make a potentially big difference to your ultimate savings. Withdrawing Your Money Without Penalty Generally, you can take penalty-free distributions from your 403(b) or 401(k) SRP when you: Reach age 59½. Separate from service after age 55. Retire before age 55 and withdraw substantially equal periodic payments (SEPPs) over your lifetime. Once you start receiving SEPPs, they must continue for five years or until you reach 59½, whichever is longer. For example, if you start payments at age 57, they must continue until you re at least age 62. Take a loan, if permitted by your employer, but you must repay it. Suffer a financial hardship (if permitted by your employer s plan). Become disabled or die; in the case of death, your beneficiaries receive the money. Withdrawals from Public 457(b) plans before the earlier of termination of employment or attainment of age 70½ are generally not permitted. However, hardship withdrawals (for unforeseen emergencies) may be permitted. And, if plan provisions allow loans, you may be able to take them for any purpose. SRP Loans A loan feature could provide a good alternative for getting your SRP money before age 59½ or retirement. Your maximum loan from all of your employer s plans depends on your particular SRP s rules, but generally it is limited by the Internal Revenue Code to the lesser of $50,000 or 50% of your total SRP accumulations. If your SRP offers loans and not all plans do you may use the money to help meet financial goals other than retirement, such as buying or renovating your home, paying for your child s college costs, starting a business, covering the costs of adopting a child, or treating yourself to a nice vacation. There are two other benefits to an SRP loan: Unlike a bank loan, paying off an SRP loan actually replenishes the savings you borrowed. And if your loan is for a home purchase, you get 10 years, rather than the normal five, to repay it. (Of course, until fully paid, any outstanding loan will reduce your available accumulation balance.) Hardship Withdrawals There are two major points to realize about hardship withdrawals: 3

4 1) It is not easy to qualify for one. You must have an event that qualifies as a hardship and you must certify that you have no other financial option, including the possibility of a loan. While the IRS permits hardship withdrawals, your employer may not because of the extra administrative work they create. Based on your written account of your hardship, your employer has to determine if you have an immediate and heavy financial need and then approve or reject your withdrawal request. 2) A hardship distribution may be subject to a 10% early withdrawal penalty and to ordinary income taxes in the year it s received. Furthermore, if you take a hardship withdrawal, you may be prohibited from contributing to your SRP for the next six months. What all this means is, before trying to get a hardship withdrawal, consult a tax professional to ensure it s your best option. However, if you absolutely have no other resources, and you qualify for a hardship withdrawal, it can generally be used to cover: Unreimbursed medical expenses for you, your spouse or your dependents A down payment on costs related to the purchase of your primary residence Tuition and fees for higher education needs, but only for the next 12 months Costs to avoid eviction or foreclosure from your primary residence Funeral expenses Certain qualified home repairs Also note that public 457(b) withdrawals may be permitted, but only for unforeseen emergencies. (Tuition cost, for example, is not considered unforeseen and would not qualify.) If You Leave Your Job With some exceptions, you can move your vested account balance with you from job to job. Generally, you have three transfer options: If your new employer s plan accepts rollovers, you can move your money into your new employer s SRP, whether it s a 403(b), 401(k) or public 457(b) plan. But if you re in a 403(b), be careful before transferring any money, since pre (b) accumulations are not subject to usual minimum distribution requirements at age 70½. You can defer distributions on your pre-1987 accumulations until age 75. Roll over your savings into an IRA. Leave the money where it is, especially if you like your investment choices. However, if your balance is below $5,000, your current employer may require you to move the money. If you re in a Public 457(b) SRP and you re going to work for another employer, you should know your three transfer options: You can transfer your money into your new employer s public 457(b) plan (if your new employer is a public employer), 403(b) plan or 401(k) plan if the new plan accepts transfers, or into an IRA. Also, if your old plan allows it, you can leave your money there. 4

5 The age 59½ early withdrawal penalty does not apply to your public 457(b) money, so you can withdraw it (subject to ordinary income taxes) without paying an additional 10% early withdrawal penalty when you terminate employment. You can roll over your public 457(b) money into a 403(b), 401(k), IRA or any SRP. However, you will lose the age 59½ early withdrawal penalty exemption unless you roll it over to another public 457(b) plan. Your Next Steps Ask your benefits office for details about your plan. Determine your risk tolerance and choose a portfolio allocation that is right for you. 5

6 SRPs in Summary Eligibility 403(b) 401(k) Public 457(b) Employees of public schools or Employees of private employers Employees of state and local 501(c)(3) tax-exempt (taxable or tax exempt) governments, including school organizations districts Contribution limit (2008) Catch-up provisions $15,500 by employee (total employee and employer contribution is the lesser of 100% of taxable compensation or $46,000) All 403(b) and 401(k) plans are aggregated to determine your maximum contribution Age 50, plus an additional $5,000 ($20,500 max) -and- With 15 years of service at an eligible institution, up to $3,000 per year ($15,000 lifetime max) $15,500 by employee (total employee and employer contribution is the lesser of 100% of taxable compensation or $46,000) All 403(b) and 401(k) plans are aggregated to determine your maximum contribution Age 50, plus an additional $5,000 ($20,500 max) $15,500 by employee (total employee and employer contribution is $15,500) If employer offers 457(b) and 403(b) or 401(k) plans, you can contribute $15,500 to each, or $31,000 in total Age 50, plus an additional $5,000 ($20,500 max) -or- Within three years of plan s retirement age, up to twice the annual contribution limit (could vary based on your prior contributions) Loans Rollovers allowed Distribution triggering events Earlywithdrawal penalty Permitted (subject to plan Permitted (subject to plan rules) Permitted (subject to plan rules) rules) Yes Yes Yes -Separation from service -Age 59½ -Financial hardship (e.g., tuition payment, home purchase) -Death or disability -Separation from service -Age 59½ -Financial hardship (e.g., tuition payment, home purchase) -Death or disability 10% before age 59½ 10% before age 59½ None -Separation from service -Unforeseeable emergency -Age 70½ The examples used in this article are hypothetical and are intended for illustrative purposes only. They are not intended to represent the performance of a specific supplemental retirement plan. The tax information provided here is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services mentioned here. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. Neither TIAA-CREF nor its affiliates offer tax advice. To learn more about retirement planning and other TIAA-CREF financial services, visit us at schedule an appointment online, or call a consultant at

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