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A Newsletter for the State of Connecticut Deferred Compensation Plan

August 2001

By now, you've probably heard about the new tax cut that the federal government approved back in June. But did you know that the same law also affects the State's Deferred Compensation Plan? It's called the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, and it means you can expect changes to the plan beginning January 1, 2002. This issue of Getting There describes changes that may affect you.

State Comptroller Nancy Wyman

New Tax Law and What It Means to You

Here's an overview of five important plan changes effective January 1, 2002. More detailed information will be provided in future issues of Getting There.

New Credit Offers Tax Break to Families With Lower Income

Current: Tax credits are not available.

New: With this new tax credit, you can contribute up to $2,000 to the plan and reduce the amount of taxes you pay. The credit you receive ranges from 10% up to 50% of your contribution. Generally, this tax credit is available if you are over age 18 and:

• Married, with adjusted gross income of $50,000 or less; or
• Single, with adjusted gross income of $25,000 or less.

So, for example, if you meet these requirements, you could contribute $2,000 to the plan and then later subtract up to $1,000 from your taxes. This tax credit is available only for tax years 2002 through 2006. Also, it's nonrefundable - if you don't owe any taxes, you don't get a refund.

Maximum Annual Contribution Increases

Current: The most you can contribute to the plan is $8,500 or 25% of your taxable income, whichever amount is less.

New: The 25% of taxable income limit is being increased to 50% in 2002. In addition, contribution limits are increased, as shown in this table.

Investment Fund Performance & Operating Fees

For the Period Ending June 30, 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 June 30, 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.

Contribute up to the Maximum in All Plans

New: Your contributions to a 401(k) or 403(b) plan no longer count toward the maximum in the 457 plan. So, for example, next year, you can contribute $11,000 to this plan and another $11,000 elsewhere - whether to a 403(b) plan, a 401(k) plan or a combination of the two.

Special Catch-Up Contributions

Current: During the three years before normal retirement, participants can make extra,"catch-up" contributions to boost their retirement savings.

New: Beginning in 2002, a new catch-up contribution will be available to participants age 50 or older. With this special age-50 catch-up contribution, you generally can contribute up to an extra $1,000 over the annual maximum to a 401(k), 403(b) or 457 plan. After 2002, the age-50 catch-up contribution amount will increase by $1,000 a year until it reaches $5,000 in 2006. Age-50 catch-up contributions will be indexed for inflation, in $500 increments, beginning in 2007.

Age-50 catch-up contributions will not be subject to any other contribution limit. Also, they're not available during the three years before your normal retirement date because the original catch-up contributions are available at that time.

With Rollovers, You Can Take It With You

Current: You cannot roll over money into this plan from any other plan, or vice versa.

New: If you have money in a 401(k), 403(b) or governmental 457 plan with a previous employer, or in an individual retirement account (IRA), you can roll that money into this plan. And, if you retire or stop working for the State, you can roll over your account balance from this plan into those plans or into any other eligible retirement plan that allows rollovers. Rollovers allow you to continue deferring taxes on the money - and on any earnings it accumulates - until you receive payment at a later date. However, withdrawals for unforeseeable emergencies cannot be rolled over.

The above article is intended as a summary only. For more details, or to discuss the impact on you personally, contact your financial advisor.

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