Frequently Asked Questions
The primary purpose of a deferred income plan is to allow you to postpone receipt of a portion of your current income until after you retire. The amount of current earnings deferred will not be considered as income for federal income tax purposes until you actually receive the income, usually after retirement when you may be in a lower tax bracket. At that time, it will be taxed as ordinary income.
By deferring payment of income taxes until you receive the value of your account as a retirement benefit, you can invest more of your current earnings for retirement. By so doing, you may reduce the total amount of income taxes paid during your lifetime and thereby accumulate a larger sum for retirement than would have been possible had you invested after-tax dollars.
By comparing the differences between independent after-tax savings plans and deferred income plans, you can see the substantial advantages of investing through a deferred income plan.
In a deferred income plan, all of the dollars you defer will be invested, and you do not pay income taxes on those amounts at the time of deferral. Income taxes on the amounts invested and on any earnings on your investments are deferred until you actually receive the money–presumably after retirement, when you may be in a lower tax bracket.
The examples below and on the following page show how deferred income can add to savings and investment, especially when measured over the long term.
Net Result of $100 in Take-Home Pay (28% Tax Bracket and 8% Interest Rate).
|Personal Savings||Deferred Income|
|After 10 Years||$18,295||$25,430|
|After 20 Years||$58,902||$81,866|
The University serves only as an intermediary to enable faculty and staff to defer a portion of their current pre-tax income through a series of routinely scheduled salary reductions. There are many companies which are authorized to write deferred income contracts for UT employees.
The University does not endorse a specific company or plan. Enrollment in these plans is purely voluntary, and the decision to participate resides solely with the individual. If the decision is made to participate, the employee is responsible for choosing a company with which to contract. The employee will then enter into a contractual agreement with the company of choice and will be bound by the provisions of that contract.
You should consider enrolling in a deferred income plan if:
• you now have and will continue to have funds available for emergencies,
• you are currently investing on an after-tax basis,
• you are paying substantial amounts of income tax,
• yours is a dual-income family,
• you are single with no dependents, or
• you are approaching retirement.
These plans are designed as a means to accumulate funds for retirement. They are not intended to serve as short-term savings accounts. You probably should not participate if:
• you have not first provided funds for emergencies, or
• you cannot afford to invest part of your earnings on a long-term basis
Normally, funds invested in a 401(k) and 403(b) plan may be distributed when one of the following events occurs:
- Death (payment is made to your beneficiary),
- Retirement (normal, early, or late),
- Termination of employment,
- Attainment of age 59 1/2, or
- 401(k) Financial hardship (subject to administrative approval).
Again, these are the events which normally must occur before the funds in your 401(k) and 403(b) deferred income accounts may be withdrawn. However, the specific rules which govern payout or withdrawal of your accumulations vary by the type of plan in which you are enrolled and the specific provisions in your plan contract.
Employee deferrals invested in a 457 plan may be distributed upon death, disability, separation from service, or financial hardship.