This is my first post! I have a little dilemma I have to decide whether I want to continue stop contributing to my city pension with the benefit that I will be able to waive FICA. Let me give some background information...

I am a NYC employee and so I have access to both NYCERS pension and a TDA/403(b). The deal was that if I contributed at least 9% to the TDA, FICA would be waived and no longer deducted from my paycheck. I liked this. I also started contributing to the NYCERS pension but I did not plan on becoming vested. I only plan on working for NYC for < 5 years so I would be able to roll my money out with 5% interest.

The issue is that it appears that contributing to the city pension precludes me from the FICA waiver. That is, If I want to contribute to NYCERS, I have to pay FICA. This is the dilemma.

Currently, FICA snatches 6.2% of my biweekly paycheck because I contribute 4.5% of my biweekly paycheck to NYCERS. If I stop contributing to NYCERS, FICA can be waived again. The downside is that I would lose the 5% interest by no longer contributing to NYCERS. The way I see it, however, is that 5% on top of 4.5% is only an extra 0.225%. That does not seem worth losing 6.2% of every paycheck unnecessarily.

Does my math make sense? Am I making sense? Am I wrong for considering FICA like any other tax that I will never get back?

Please hit me with some feedback. Sorry for the extra long post

Thanks, Hal


If I am interpreting the information in your post correctly, then you are completely correct that NYCERS is by no means worth it--there is no dilemma here. In fact, I think NYCERS a worse deal than you are giving it credit for.

NYCERS contribution costs you 6.2% of your TOTAL income because of the tax implication. The value of contributing to it is only the difference between what you can earn there and what you would earn in your 403(b). It's not clear whether that is even a positive number. Even if it is, it is only some small percentage times your contribution amount, which is 4.5% of your total income. The benefit of contributing to NYCERS is minuscule or even nonexistent. There is no way on earth that it makes up for your tax loss.

Remember, the 5% interest you get in NYCERS (is that annually or total?) is compensation for the time value of money. It's not as valuable as an immediate 5% gain on your contributions and nothing near as valuable as a 5% increase in your income. If you keep your money out of NYCERS then you can earn capital gains on it elsewhere, like in your 403(b) or in an IRA.

When it comes to investing, legally avoiding taxes is pretty much always top priority. Choosing among investments is also important, but not nearly as much. In your case the answer seems quite clear. Stop contributing to NYCERS immediately.

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    If NYCERS is a DB defined benefit scheme that is a very bad idea its only in very rare cases that opting out of a DB pension makes sense. – Pepone Apr 9 '16 at 17:27
  • @Pepone looks like you didn't read the original post nor my answer. There are several very obvious reasons stated in both why opting out in this case is best and why your preconceptions about DB pensions do not apply. Please read carefully before commenting or voting. – farnsy Apr 9 '16 at 17:43
  • @farnsy I am totally going to stop my NYCERS contribution - but I do think if not for the extra 6.2% in tax, that NYCERS was a good deal. I am quite sure the 5% is annual and guaranteed 5% is something I think is hard to come by. Is it comparable to the gains possible with equity investing? Obviously not...but it does offer a safe 5% which I liked...In any case the point is moot now because of the extra 6.2% tax I am incurring – Hal Apr 10 '16 at 2:14
  • @Hal Agreed. 5% annually risk free on 4.5% of your is an amazing return in this environment. But it's very small compared with -6.2% of your total income. – farnsy Apr 10 '16 at 17:29

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