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A Newsletter for the State of Connecticut Deferred Compensation Plan

February 2002

The State of Connecticut's Deferred Compensation Plan just got better! That's because there are now two kinds of catch-up contributions you can use to save more in the plan. One new type results from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The second type already existed, but has been improved by EGTRRA. This issue of "Getting There" focuses on the extra amount you can now save through regular catch-up contributions.

State Comptroller Nancy Wyman

Two Ways to Catch Up on Your Contributions

#1 Age 50 and Older Catch-Up Contributions

If you are at least 50 by December 31, 2002 you can contribute an extra $1,000 over the Internal Revenue Service (IRS) maximum annual contribution limit (see back cover). After 2002, the amount increases by $1,000 each year until it reaches $5,000 in 2006. Age 50 catch-up contributions will be adjusted for inflation beginning in 2007.

Late in 2001, the IRS issued clarification on individuals who participate in both a 457 plan and a 403(b) program. Specifically, if you participate in both a 457 plan and a 403(b) program, you can make age 50 catch-up contributions to both plans. However, you cannot make special age 50 catch-up contributions in the years that you elect to make regular catch-up contributions.

#2 "Regular" Catch-Up Contributions - Improved!

You may recall that the plan has a feature that allows you to make up the contributions you could have made while participating in the plan from 1978 on, but didn't. The limit for regular catch-up contributions has increased as of January 1, 2002. Now, you can contribute up to twice the normal IRS maximum annual contribution. This means that, for 2002, the regular catch-up contribution limit is up to $22,000. The regular catch-up contribution limit will increase each year, as the regular annual contribution limit rises.

When You Can Make Regular Catch-Up Contributions

You may elect to make regular catch-up contributions once during your career. You're eligible to make regular catch-up contributions in the three years before your retirement date, assuming you are eligible for full benefits under your State-sponsored pension plan and have not yet reached age 701/2.

Example. Suppose Joe becomes eligible for full retirement benefits in 2005, but decides not to retire until 2010. In that case, he can make regular catch-up contributions for the calendar years 2007 through 2009.

Investment Fund Performance & Operating Fees

For the Period Ending December 31, 2001

You may invest your contributions with any one of the plan's three financial services organizations: ING Aetna Financial Services, Hartford Life Insurance Company and Phoenix Investment Partners.

The following charts will help you evaluate your investment choices - both mutual funds and annuity options. They show the historical rates of return for each financial services organization's available investment options and the various operating fees that may be assessed against these options for the period ending December 31, 2001.

The rates of return columns are "net of expenses" and reflect the actual returns that would be applied to your account. This means that they already exclude the operating fees a financial services organization may charge you for managing, investing or marketing a particular investment option. Operating expenses appear in separate columns.

About Your Fund Choices

To help you identify between these two types of options, variable annuities appear in italic print. When comparing two similarly styled mutual funds or annuity options, be sure to:

• Recognize that while a fund's past performance may help you understand how well or poorly it has performed over a period of time, it's no guarantee of future results.
• Consider the total expenses each fund charges as well as the kinds of services or benefits it provides. Keep in mind that you can reduce your overall investing costs by monitoring these expenses and taking them into account in your investment selection process.

Since each financial services organization offers similar investment opportunities, it's a good idea to review the materials from each of these organizations before you make your decision as to where to invest your money. Then, select the one financial services organization that offers the investment options and products that best match your personal financial goals.

* After the close of business on November 26, 1997, the PPI MFS Emerging Equities fund replaced the Alger American Small Cap fund and the PPI Scudder International fund replaced the Scudder VLIF International fund. The five-year rate of return includes performance for the Alger American Small Cap and the Scudder VLIF International funds from 4/1/96 to 11/26/97 and the current funds from 11/27/97 to the present. For more information, please call your ING Aetna representative.

Calculating "Regular" Plan Catch-Ups

To figure out the maximum regular catch-up contribution you can make, just follow these six steps:

IRS Maximum Annual Contribution

The IRS limits the amount you can contribute to the plan. As of January 1, 2002, this limit is either 50% of your taxable income or the amount shown below, whichever is less.

* Special rules apply for years before 2002. The limit is either the dollar amount shown in the table above or 25% of taxable income, whichever is less. Contributions to a 403(b) plan, a 401(k) plan or any other tax-deferred plan are deducted from the IRS maximum annual contribution amount.

Although we've provided the steps for figuring out your total catch-up contribution above, the calculations for each year can be difficult. If you are interested in making catch-up contributions, you should ask your financial services organization for help in figuring out how much you can contribute, especially if you have participated in the State's 403(b) Program.

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