The Sisyphus Comments

Build Your Nest Egg

As a public service worker, you may not realize that you have an opportunity to build a nice tax deferred retirement nest egg. Many state and local employers offer their employees the opportunity to participate in 457 or 403(b) plans. These retirement savings plans are designed to help you build a healthy retirement. Most public employees are provided with a pension upon retirement but the pension is no where near the amount of your salary.  A 457 or 403(b) plan that may be available to you through your employer can provide a healthy supplement to a pension.

Both of these plans help you manage your current tax situation since the contributions are made on a pre-tax basis which can greatly reduce your tax bill. Generally, if you contribute $100 a month to a 457 or 403(b) plan, you’ve reduced your federal income taxes by roughly $25 (assuming you are in the 25% tax bracket). In effect, your $100 contribution costs you only $75. The tax savings are magnified as your contribution increases.

In addition, there is even more tax savings since all dividends, interest and capital gains accumulate on a tax-deferred basis. This means your earnings will grow tax-free until time of withdrawal.

So how much can you contribute annually? For 2007, workers are able to contribute the smaller of:

1. the new elective deferral limit of $15,500, or
2. up to 100% of includable compensation (must be less than the elective deferral limit), or
3. for those with employer matches or other employer contributions, limits are $45,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($15,500 for 2007). An employer can add up to another $29,500.

In addition, if you are 50 or older at any time during 2007, you may contribute an additional $5,000. There is also a provision of the Internal Revenue Code that temporarily increases the elective deferral limit for those eligible employees. This increase is known as the 15-year-rule. This special provision increases your elective deferral limit by as much as $3,000 more than the current $15,500 limit (as of 2007). To qualify you must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and you cannot have contributed more than an average of $5,000 to a 403(b) in previous years. The increase in your elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,000 lifetime maximum. If you have 15 or more years of service with your employer, consult with a tax professional concerning the limits on your contributions.

Most public employees, including police officers and deputies, will get a pay increase beginning in July. Why not look into starting a 457 deferred compensation account with the increase. Since you have started to receive the extra money, you won’t miss it and it will build into a nice nest egg by the time you retire.