November 2014 DC Update
Adding It Up: Contribution Limits and Taxes
Last month the IRS announced contribution limit increases for the 2015 tax year. Most notably, the annual elective deferral (contribution) limit for the 457 plan increased from $17,500 to $18,000. The contribution limit topic sheds light on an important deferred compensation plan benefit that should never be overlooked: tax savings. Pre-tax contributions to the deferred compensation plan effectively lower your taxable income in the year the contributions occur. The lower your taxable income, the less taxes you pay.
To think of it another way, consider this pumpkin pie. Who doesn't love pumpkin pie? The problem is, every time you bring pumpkin pie to the big family get-together, your Uncle Ted is guaranteed to eat half of the pie, or 4 slices, not leaving much for you or the rest of the family. But what would happen if you removed 2 slices from that pie before the party? Sure, you may get some strange looks for serving a partial pie at dessert time, but when Uncle Ted eats half of the pie this time, he's only getting half of 6 slices instead of 8. Add the 2 slices you saved back to the pie pan afterwards and you have 5 slices left instead of 4. Saving the 2 slices before Uncle Ted has a chance to devour your pie, saved you an extra slice in the end.
In a nutshell, that's how pre-tax savings to the deferred compensation plan work. You pay yourself first, which lowers your taxable income, and then Uncle Ted - I mean Uncle Sam - gets less of your pie. Even better than the pumpkin pie example, those pre-tax savings can then grow, tax free, until you need to access your money in retirement. Then, and only then, will your savings incur taxes. Visit the Education Resources section of modeferredcomp.org to see how the actual tax savings work out for a sample employee making $25,000 per year.
Tax Savings Example
Let's say you make $25,000 a year. You choose to contribute 6% of your pay on a pre-tax basis. That means you're putting $1,500 a year into the Plan. This lowers your taxable income to $23,500. The result is your income tax bill is lower than it would have been if you hadn't contributed to the plan. You're keeping some of the money for yourself that you would have paid in taxes. Makes sense, right?
Here's how the actual tax savings works out (using 2014 tax rules):
| With Contribution | Without Contribution | |
|---|---|---|
| Gross Pay |
$25,000
|
$25,000
|
| 6% pre-tax savings |
-$1,500
|
$0
|
| Pay subject to federal income tax |
$23,500
|
$25,000
|
| Less Personal exemption |
-$3,950
|
-$3,950
|
| Standard deduction |
-$6,200
|
-$6,200
|
| Adjusted Gross Income |
$13,350
|
$14,850
|
| Federal Taxes @ 15% |
-$1,447
|
-$1,672
|
| Net Take Home Pay |
$22,053
|
$23,328
|
| Less after-tax savings |
-$1,500
|
|
| Total |
$22,053
|
$21,828
|
| Contributing to the plan reduced income taxes by |
-$225
|
|
|
Assumes:
|
||
Your Neighborhood Education Specialists
Do you know your deferred compensation plan education specialist? These representatives live and work right here in the state of Missouri and take pride in helping you make the most of the deferred compensation plan benefit. They include Jonathan Binkley, who serves the west-central, central, and northeastern portions of the state, in addition to 9 Cole County agencies; David Gibson, who's responsible for the northwestern portion of the state, including Kansas City; Tasha Reinkemeyer, who oversees 10 Cole County agencies; Dale Rippelmeyer, who covers the eastern edge of the state, including St. Louis; Dale Stuckey who oversees the southeastern portion of the state; Deborah Taylor who serves the southwestern portion of the state; and Don Wilson, CFP®, who serves the south-central portion of the state as well as 9 Cole County agencies. FREE education and consultations from these education specialists are part of what makes the deferred compensation plan an important employee benefit. These education specialists do not receive commissions for the amounts you contribute to the Plan or the investment options you choose inside the Plan, making them a trusted source of Plan information. If you haven't done so already, we encourage you to meet your neighborhood education specialist by contacting them directly or by registering online for a one-on-one consultation or seminar in your neck of the woods.
National Save for Retirement Week Wrap-up
Thanks to everyone who helped make the Plan’s National Save for Retirement Week “I Rep-Percent Savings” campaign a success. Whether you changed to percent-of-pay contributions or completed our Retirement and Savings Survey, or both, your support is what continues to make the deferred compensation plan a valuable employee benefit. Survey results will be posted to modeferredcomp.org and our social media channels later this month.
Auto Enrollment Report
This report contains cumulative auto enrollment data by department as of October 1 of 2014.
Please note: Detailed data for agencies with 10 or fewer hires is omitted in this report.
| Department | Total AE | Opt Out | Net AE | AE Success Rate |
|---|---|---|---|---|
| State Auditor | 20 |
0 |
20 |
100.0% |
| Administration | 195 |
12 |
183 |
93.8% |
| Corrections | 2102 |
188 |
1914 |
91.1% |
| DESE | 256 |
23 |
233 |
91.0% |
| Social Services | 1606 |
159 |
1447 |
90.1% |
| Revenue | 236 |
24 |
212 |
89.8% |
| Agriculture | 39 |
4 |
35 |
89.7% |
| Transportation | 595 |
68 |
527 |
88.6% |
| Ins, Fin Inst, Prof Reg | 67 |
8 |
59 |
88.1% |
| Health & Senior Services | 285 |
37 |
248 |
87.0% |
| DNR | 144 |
19 |
125 |
86.8% |
| Labor & Industrial Relations | 54 |
8 |
46 |
85.2% |
| Public Safety | 889 |
137 |
752 |
84.6% |
| Judiciary | 541 |
84 |
457 |
84.5% |
| Secretary of State | 43 |
7 |
36 |
83.7% |
| Conservation | 72 |
12 |
60 |
83.3% |
| Mental Health | 1668 |
296 |
1372 |
82.3% |
| State Public Defender | 145 |
29 |
116 |
80.0% |
| Econ Development | 87 |
20 |
67 |
77.0% |
| Attorney General | 91 |
21 |
70 |
76.9% |
| Legislature | 114 |
31 |
83 |
72.8% |
| Higher Education | - |
- |
- |
- |
| MOSERS | - |
- |
- |
- |
| Missouri Consolidated Healthcare | - |
- |
- |
- |
| Housing Development Commission | - |
- |
- |
- |
| State Treasurer | - |
- |
- |
- |
| Highway & Highway Patrol | - |
- |
- |
- |
| Governor's Office | - |
- |
- |
- |
| Lt. Governor | ||||
| Totals | 9,292 |
1,194 |
8,098 |
87.15% |
Thank You for Your Continued Support
Thanks for tuning in to the November video edition of the DC Update. With Thanksgiving just around the corner, we’d like to thank each and every one of you for your continued support of this important benefit. We know saving money for retirement isn’t easy, but your participation helps make the deferred compensation plan a low-cost retirement savings option. To get even more out of the Plan, be sure to join your coworkers who have connect with us on Facebook, YouTube, LinkedIn or Twitter. Whatever your preference, our social media platforms are the best way to receive important plan news, savings tips and much more.