John R. Mumma
August, 2011
As your elected representative on the City of Los Angeles Deferred Compensation (DC) board, I want to explain the latest change to the plan — the implementation of Roth investing. Roth is probably a term you already know, as in Roth IRA. The same principle applies here; your money grows tax-free and you never have to pay taxes on it. (As long as when you withdraw the funds, you are 59½ years of age and you have held the Roth 457 account for a minimum of five years.) This is a phenomenal benefit to those of us in the public safety world here in L.A. By contrast, under the deferred compensation system as you’ve known it for the past 28 years, you had to pay taxes on all of the interest you earned on your account. And since interest typically amounts to about 70 percent of the total assets in mature accounts, that hit is significant. Still, it beats most other forms of investing as an individual because of the extremely low fees (courtesy of being part of a pool of money in the several billion dollar range).
Late last year, the U.S. Congress changed the rules to allow for Roth investing in a DC plan, and we are one of the first plans in the country to get it up and running. If you are likely to retire into a higher tax bracket, this is for you. While that might seem like an odd statement, think it through. In the past decade, we have seen our pensions go from a maximum of 70 percent to 90 percent of final pay. Add in the several hundred thousand dollars you can accrue in DROP and as much as $1 million plus in your deferred compensation account, and you are easily in a higher tax bracket when you retire. Thus, being able to draw on your account without paying any taxes is almost too good to be true.
There is a catch, of course — you have to pay taxes on the money you initially invest. That is a 180 degree turn from the mantra of old, which was “Lower your current taxable income by investing in DC.” While you still have that option, remember that under the old rules you will have to pay taxes on all of your withdrawals. If you don’t plan to work long enough to get that big pension and DROP, then maybe you should stick with the old system. Or you can split it and invest both ways.
The same investment options are available to both investments, and remember that in the last few years we have opened up the plan to allow you to invest in any publicly traded stock, bond, ETF and the like that is sold on a U.S. exchange. Years ago, your options were indeed more limited, but that has changed. And even with those limits, let me point out that several dozen of you have DC account balances well over $1 million. If you are one of the few police officers/firefighters who don’t currently participate, it is never too late to start. Ask your partner because there is a 90 percent chance that he or she has an account. Then contact your personal financial consultant (as I’m not allowed to give such advice).
Contact me at johnmumma@lappl.org or the DC staff in Room 867 at City Hall for further details. You can also visit www.cityofla457.com or the Member Services page of LAPD.com for up-to-date information.
