UA-R-GC-1914-01-01-1978-10-26_Page-019

1. Tax-Deferred The American effective as Tax-Deferred Annuity Plan Resolution This Resolution sets forth the provlslons of the TIAA-CREF Annuity (TDA) Plan established by the Board of Trustees of University in Cairo, herein referred to as the University, of September 1, 1978. II. Basis for Tax-Deferral. Employees of a college, university, private school, or other nonprofit organization tax-exempt under Section 501(c)(3) of the Internal Revenue Code may arrange with their employer to divert a portion of their salary before taxes to purchase retirement an­nuity benefits under the tax deferral arrangement authorized in Section 403(b) of the Code and related Treasury Regulations. This "salary-or-an­nuity option" is the method used by many educators for payment of regular employee contributions to the institution's retirement plan. It can also be an advantageous way to set aside extra funds for the future, over and above those accumulating under a retirement plan. To invest in a tax-deferred (or "tax-sheltered") annuity, the employee and employer enter into a written agreement through which the employee agrees to a reduction in salary and the employer agrees to pay a premium, in the amount of the reduction in salary, on an annuity contract that is fully vested in the employee. Within the statutory exclusion al­lowance such premiums are not taxed to the employee currently; rather, they and their earnings will be taxed when the employee receives them as benefits. If the benefits are received in the form of annuity income dur­ing retirement years, the individual is likely to be in a lower tax bracket. But the tax advantage of the salary reduction method as a means of saving for the future does not necessarily depend on a lower tax bracket during the retirement years. In contrast to after-tax savings methods, the money an employee does not payout in current taxes goes into his or annuity contract and accumulates with investment earnings. For example, assume an employee is in a 30% tax bracket and can get along with $1,000 less take-home pay in order to set aside funds for future use. It takes about $1,400 of salary to produce $1,000 of take-home pay, after taxes. The employee can either pay tax currently on this $1,400 of salary, which leaves $1,000 for savings, or can take a salary reduction of $1,400 and channel the full $1,400 into a tax-deferred annuity. Either way, the in­dividual has $1,000 less to spend currently, but the salary reduction method puts $400 more each year into his or her contract to accumulate with in­terest earnings, tax-free until the person starts receiving benefits. Be­cause of the earnings on money not currently paid to the government and the resulting build-up of funds one would not otherwise have, the salary re­duction approach is likely to work to the em~loyee's advantage even if he or she is not in a lower tax bracket when benefits are received. Under this plan, and within the limits of Sections 403(b) and 415 of the Internal Revenue Code, an eligible employee may enter into an agreement with the University whereby the employee's salary is reduced and the amount of th