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TIAA and CREF are two different companies, each having a different type of annuity. TIAA is an insurance company offering traditional annuities and a variable annuity real estate account. CREF is an open-end diversified company offering variable annuities.
The TIAA-CREF pension plan at the University of Iowa is a “defined contribution plan,” where contributions during one’s career are allocated by the participant to selected investment alternatives. Retirees and soon-to-be retirees also have a number of choices that need to be made regarding how they will receive retirement income.
Major Retirement Income Decisions
Goals important to those receiving retirement income must be considered in making the required decisions. Goals might include the following:
Some of the major decisions to be made with regard to receiving pension benefits are difficult or impossible to change once they have been made. Therefore, it is imperative that careful thought be given to the decisions before they are executed. It is often prudent to seek competent accounting, financial, and legal advice. Here is a listing and brief discussion of the nature of some of the more important decisions:
To Create an Annuity or Not
The traditional lifetime annuity creates a pension benefit payment stream for as long as the annuitant lives. There are features which may be added to the basic annuity to accomplish specific desires of the annuitant.
The major advantage to creating an annuity with one’s retirement funds is that the retiree is assured of receiving a benefit for life, no matter how long he or she lives.
There are also disadvantages:
When to Start Taking Retirement Distributions
There are legal requirements regarding when distributions must begin from a pension plan and how much these distributions need to be to avoid tax penalties. In addition, there are voluntary choices an individual can make that will greatly influence the timing and amount of income received.
Decisions if One Creates an Annuity
Whether to Partially or Fully Annuitize
It is not necessary to create an annuity with the entire TIAA-CREF account. Rather, one can create an annuity with only a portion of the assets in TIAA-CREF. If an individual does not need the amount of retirement income that would result from creating an annuity from the entire accumulation at a single point in time, multiple annuity starting dates allow the unannuitized portion of the account to continue to grow so it can be used at some future date.
What Type of Annuity to Select
Many features exist that can be used to individualize an annuity.
Single v. Joint: These are sometimes referred to as one-life and two-life annuities. A one-life annuity will pay an income for the life of the retiree, with all payments ending at death unless a guarantee period has been selected. A two-life or joint annuity will pay a lifetime income with the spouse or other annuity partner continuing to receive a lifetime income even if he or she lives longer than the retiree.
Nature of Survivor Payment under Joint Annuity Option: A joint annuity may be set up so that the retiree’s annuity partner receives a full benefit, a two-thirds benefit, or a half benefit. For example, if the benefit is $3,000 a month, the annuity partner will receive the same amount for the rest of his or her life under the full benefit, but only $2,000 under the two-thirds benefit and $1,500 under the half benefit.
Length of the Guarantee Period, if One is Chosen: A guarantee period may be selected under either a one-life or a two-life annuity. If the retiree dies (one-life option) or both annuity partners die (two-life option) during the guarantee period, benefit payments continue to be made to the beneficiary for the remaining length of the guarantee period. Guarantee periods of 10, 15, and 20 years are typically available from TIAA-CREF. For example, a joint annuity with a full survivor benefit might have a 15-year guarantee period attached to it. If both the annuity partners were receiving $3,000 a month and both died five years after the annuity was started, the beneficiary would receive $3,000 a month for the next ten years.
The older the annuitant and the longer the guarantee period, the more the guarantee costs. The cost comes in the form of a lower benefit payment. In effect, “buying” a guarantee period is very similar to the purchase of term life insurance. Individuals need to consider this matter carefully since the amount of TIAA-CREF accumulations to be “protected” may be substantial.
Beneficiary Designations The choice of a beneficiary may be more important than most people realize. Beneficiaries are broadly classified into Spouse and Non-spouse beneficiaries. Non-spouse beneficiaries might include children or other relatives of the annuitant or an estate, non-profit corporation or other entity that is not a natural person. There may be important ramifications in the areas of estate planning, taxation, and mandated distributions associated with the beneficiary designation.
Standard v. Graduated Benefit Payment: TIAA traditional annuities offer two payment methods: “standard” and “graded.” These two methods differ in their treatment of the dividend portion of retirement income, which can affect the level of income over the years. Both provide a guaranteed amount of income plus an “extra” above the guarantee. The “extra” is a dividend and may increase or decrease each year and is not guaranteed. The Standard Method pays out the entire dividend each year. The Graded Method pays out part of the dividend and reinvests the rest to increase income in the future. Some annuitants may select the Graded Method in an attempt to “inflation-proof” their income by having it increase over time.
Use of Alternative (Non-Annuity) Retirement Options
There are a number of methods retirees can use to gain access to retirement funds without annuitizing. The advantage of using these methods is that undistributed funds are available for the retiree’s estate. The major disadvantage is that the retiree has no guarantee that he or she will receive a benefit for life. These methods include:
Cash Withdrawals: Cash withdrawals pay out a retirement accumulation in a single sum or in a number of regular distributions. If one decides to use a cash option, the legal and tax consequences should be carefully reviewed before making a withdrawal. The retiree may want to obtain (available on their website) TIAA-CREF’s publication: “Taking Money from Your TIAA-CREF Accounts.”
Systematic Withdrawals: TIAA-CREF has a Systematic Withdrawal Service, which lets a retiree receive cashable CREF accumulations through a series of systematic payments. This service allows one to specify the amount and frequency of payments. Once payments begin, they will continue for the period specified. However, the amount and frequency of payments can be changed, as well as stopped and restarted, as the retiree’s needs dictate. See the CREF prospectus on the TIAA-CREF website for more details.
TIAA Interest Payment Retirement Option (IPRO) Retirees between the ages of 55 and 69 ½ who have terminated employment may receive payments of the interest that would otherwise be credited to their TIAA traditional accumulation account. The IPRO option, as it is called, is available for all of the retiree’s TIAA Traditional accumulations or any portion of at least $10,000.
Using the IPRO option allows one to postpone the selection of an irrevocable lifetime annuity option. The accumulation remains the same while the retiree receives IPRO payments. Payments are determined by the interest rate used by TIAA to credit TIAA accumulations. If a retiree dies while receiving IPRO income, the beneficiary will receive an amount equal to the starting accumulation plus any interest earned, but not yet paid.
Minimum Distribution Option (MDO) Payments provide the minimum amount the retiree is required to receive under federal law. Currently, this means that a retiree must begin to withdraw funds from a pension plan by April 1 of the year after reaching 70 ½. For example, an individual born August 30, 1939 would become 70 ½ in 2010. This individual could wait until April 1, 2011 to take the first minimum required distribution. If the individual waits until 2011 to take the first year’s (2010) payment, that payment and the one required for 2011 would both need to be received in 2011.
The MDO does not require converting the accumulation to a lifetime annuity. TIAA-CREF will calculate the minimum payment legally required to be taken from a retirement accumulation each year based on tables provided by the Internal Revenue Service. As noted earlier, the MDO does not guarantee a lifetime income since the accumulation could be reduced depending on the investment results of TIAA-CREF. When the accumulation reaches zero, payments will stop.
Taxation of Retirement Benefits
Benefits received are taxed according to how the contributions were made. Payments received from after-tax contributions (non-tax deferred) are not subject to tax since taxes were paid initially. Benefits resulting from employer and tax-deferred employee contributions, plus all investment returns, are subject to federal income tax in the year they are received. An additional 10% tax applies to benefits received before age 59 ½ unless an exemption applies. This topic is discussed in more detail in the two IRS publications: Publication 575, “Pension and Annuity Income,” and Publication 590, “Individual Retirement Arrangements.” The IRS website is: www.irs.gov.
Payment of retirement income may be postponed until the starting date required by federal law as discussed under the MDO material. Delaying the start of annuity income will normally increase the size of the payments.
If a retiree dies before beginning annuity income, the full current value of the retirement accumulation is payable as a death benefit to the named beneficiary (ies). With both TIAA and CREF accumulations, the payments may be in any one of several forms as described on their website.
Any non-annuitized retirement accumulation is included in the retiree’s personal estate. For some retirees, the accumulation will exceed the existing federal estate tax exemption. Those whose accumulations exceed these legal limits need to engage in estate planning if they wish to minimize the payment of the estate tax.
More detailed information on these complex financial planning issues can be obtained from TIAA-CREF through their website or their publications.
The TIAA-CREF website is: www.tiaa-cref.org. This website contains an abundance of information about TIAA-CREF, the various funds, long-term health care insurance, trust services, etc. You can, at no cost, order publications or create your own retirement illustration. Access to some of the information specific to your account requires use of a personal identification number to protect your privacy. If you do not have a PIN #, you can call TIAA-CREF or request one through the website.
Local resources include the University Benefits Office and the local TIAA-CREF office at 327 2nd Street, Coralville (319 356-8000).
If you have participated in the Iowa Public Employees Retirement System, information about your benefits can be obtained by calling IPERS at 1- 800-622-3849. The IPERS website (www.ipers.org) is also useful for obtaining general information about IPERS.
The University Benefits Office has a great deal of information on its website: http://www.uiowa.edu/hr/benefits. Please consult that site if you have a question about benefit plans/design/coverage. In addition, Benefits Specialists are available to talk with you about your retirement questions and concerns relating to TIAA-CREF, health insurance, etc. The web site is also available through the A-Z search.
Retirees should contact the Social Security Office at least three months prior to the time they wish to begin collecting Social Security payments. The earliest age at which one can collect Social Security retirement payments is 62, but the longer one waits, the higher the payments will be. The phone number for the Iowa City office is 319 338-9461. The website for The Social Security Administration is: www.ssa.gov.
Group life insurance through the University ends upon retirement. However, those who are at least 62 with 10 years of service will receive a paid-up life insurance policy. The value will be between $2,000 and $4,000, depending on the length of employment. Exception: Staff who retire under the 2009 Early Retirement program will not receive a paid-up life insurance policy. After retirement, it is possible to convert group life insurance to an individual whole life policy with the Principal Financial Group. The cost is significant, but coverage is guaranteed and no physical examination is required.
Caveat: Much of the material just presented is focused on the nature of decisions made by retirees. However, these are complicated decisions and the discussion presented here is based on current law and regulations. Make sure these laws and regulations still apply when making financial retirement decisions. As indicated, given the importance of some of these decisions, expert accounting, legal, or financial assistance may be valuable since many special personal circumstances may exist.
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