University of Washington volUntary investment program
What is the Voluntary inVestment Program (ViP)? What should i consider regarding
ViP ParticiPation?
The VIP is a tax-deferred retirement savings opportunity, under
Section 403(b) of the federal government’s Internal Revenue Carefully consider the amount you save with the VIP. While VIP
Code (IRC). savings enjoy a tax-advantaged status, they may also be subject
to early withdrawal penalties under the IRC if you request a
University of Washington employees can use the VIP’s tax distribution before you are 59 ½ years old. Withdrawal prior to
advantages to save beyond the University’s mandatory 59 ½ carries a 10% penalty, and is considered taxable income
retirement plans. It’s not necessary to be enrolled in one of the at time of distribution. See also the section “When Can I Begin
basic UW retirement plans to use the VIP, and you may enroll at Taking Distribution From My VIP?” on page 5 of this brochure.
any time.
Please refer to the VIP Plan document for more information:
Who can ParticiPate in the ViP? www.washington.edu/admin/hr/benefits/forms/invest/
vip/vip.plan.doc.pdf
As a UW employee, you are eligible to participate unless:
• you are a student whose wages are FICA-exempt*, or limits and ProVisions
• you are a nonresident alien who receives no U.S.-source contribution limits Under the IRC, the IRS sets annual limits
earned income, or on: (1) total, combined employee and employer contributions to
defined contribution retirement plans like the UW Retirement
• you are an employee who normally works less than half Plan (UWRP) and VIP; and (2) your total voluntary deferrals
time. under such plans. These limits can be found at www.
* If you are a student employee covered by a bargaining agreement that washington.edu/admin/hr/benefits/retirement/vip.
confers eligibility, you may participate in VIP regardless of your FICA-
exempt status.
age 50 catch-up This limit is established each year by the
Why should i ParticiPate in the ViP? IRS. This limit is available to all at age 50 or over, and is in
addition to any general limit above. The current Age 50 Catch-
• tax advantages When you participate in the VIP, up amount can be found at: www.washington.edu/admin/hr/
deductions are made from your gross salary before taxes benefits/retirement/vip.
are calculated, so you pay less tax now. Your contributions
and earnings grow tax-deferred until you request a Benefits & Work/Life reserves the right to stop VIP
distribution, usually at retirement, when you may be in a contributions to prevent over-deferrals. If you provide us
lower tax bracket. with a new calculation that shows there is additional deferral
available, you may rejoin the program.
• automatic and regular savings As the savings adage
goes, “Pay yourself first!” Because your VIP contributions suPPlement your uW retirement Plan With ViP
are automatically deducted from your paycheck before
income taxes, you avoid the temptation to spend the money The University’s mandatory retirement plans—
each pay period. the UW Retirement Plan (UWRP) for faculty, librarians, and
professional staff and Public Employees’ Retirement System
• Flexibility The VIP allows you to change the amount you (PERS)/TRS/LEOFF for classified staff—offer a great foundation
save—or stop or start saving—in any pay period of your for eligible employees to save for retirement. However, they
VIP participation. may not be sufficient to meet your total income need during
retirement. The University offers the VIP to allow you greater
• Fees and expenses Your investments into the plan are
flexibility to save more for retirement in a tax-deferred
not charged a “load” or commission on each transaction.
retirement savings plan.
This is an important cost savings since you are investing a
small amount of money on a regular basis. All funds have
expense ratios that should be considered when choosing a
fund. Expenses can be found on the web site of each Fund
Sponsor or in your fund prospectus.
2
Suppose, at the beginning of each year, you save $2,500 annually
for 30 years in a taxable account and save another $2,500 each
year in a tax-deferred account. Compare the results below,
given a hypothetical 8% average annual rate of return and 25%
combined capital gains and income tax rates.
$450,000 —
$400,000 —
$350,000 —
$300,000 —
$250,000 —
$200,000 —
taxable account tax-deferred account
$209,504 $305,864
The chart assumes savings of $2,500 annually for 30 years in a taxable and tax-deferred account,
an 8% average annual rate of return, and a combined tax rate of 25%.
Income tax is due upon distribution of amount from the tax-deferred plan, and an IRS 10% premature
distribution penalty tax may apply to withdrawals before age 59 ½. Lower maximum tax rates on capital
gains and dividends would make the investment return from the taxable investment more favorable,
thereby reducing the difference in performance between the accounts shown. Please consider your
personal time horizon and income tax bracket, both current and anticipated, when making an invest-
ment decision as they may further impact the results of the comparison. Bear in mind that changes in
tax rates and tax treatment of investment earnings may impact the comparative results
3
Finding the money to inVest
Retirement plans—such as the UWRP, PERS, and Social Security—may cover some or most of
our income needs during retirement, but these funds are unlikely to be enough. Can you find a
spare $10 each month from your current disposable income to invest in the VIP?
VIP contributions are deducted from your gross salary, and you can designate an amount as
low as $15 per pay period. For many VIP participants, this makes setting aside investment
funds relatively painless, especially with minor trimming of current expenses. For example,
suppose a 30-year-old saves $2 per day in the VIP for 35 years at a hypothetical 8% rate of
return. At age 65, that $2 per day will have grown to more $130,000.
That $2 per day—about the price of a cup of coffee—adds up over time. Consistently devoting
even a small amount to your VIP account (before your take-home pay is calculated), is a great
way to ensure additional resources for your retirement.
4
When can i begin taking choosing an inVestment Vehicle
distributions From my ViP?
How an investment performs hinges on many factors.
To be eligible to make a withdrawal of your salary As an investor, you can’t control many of these
reduction contributions and associated earnings, factors—the returns of the markets, for example.
the IRC states that you must satisfy one of the But you can control others—such as how you
following requirements before making a full or partial approach investing, the factors you deem important
withdrawal from your VIP: in developing your portfolio and keeping it on track,
• you have severed your employment with your the cost of the investments you choose, and what you
employer; look for when choosing the investment companies with
• you are disabled; whom you do business.
• you are 591⁄2 or older; Those who focus on the factors that they can control
• you encounter financial hardship as defined by will have taken the most effective approach toward
the IRC (earnings not available in the case of investment success over the long term.
hardship);
• you have died, in which case your designated building and maintaining a PortFolio
beneficiary would receive the funds in your VIP; Whether you are just beginning to build your personal
• the withdrawal is to a former spouse, child, portfolio or are a seasoned investor, being aware of
or other dependent pursuant to a Qualified these three factors in important:
Domestic Relations Order; • investing is a long-term proposition.
• you have an account value under an annuity You cannot regard an approach based on short-
contract of funds accumulated before 1989, and term trends or performance as an “investment
never invested in a mutual fund account, in which philosophy.” And the risk of price declines in
case your pre-1989 funds may be withdrawn the bond and stock markets is too significant to
without regard to the IRC restrictions. shield money that you will need for short-term
goals. Therefore, consider as an investment only
Please refer to the VIP Plan document for more money that you won’t need for a minimum of five
information: www.washington.edu/admin/hr/ years.
benefits/forms/invest/vip/vip.plan.doc.pdf • Asset allocation and diversification
are musts. Although it seems almost
counterintuitive, the most important
When do i haVe to begin investment decision you’ll make is not the
receiVing Payments From my ViP? specific investments you select, it’s your asset
The IRC requires that a participant in the VIP begin allocation—that is, the mix of stocks, bonds, and
receiving Required Minimum Distributions (RMD) no cash you determine will best help you meet your
later than April 1 of the year following the year he or goals. Being broadly diversified, with exposure to
she turns age 70 1/2 or retires from the employer all parts of the stock and bond markets, reduces
sponsoring the plan, whichever is later. If you are still the amount of risk your portfolio is exposed to.
employed by the employer sponsoring the plan after
you turn 70 1/2. you may delay distributions until your
retirement and you may continue to contribute to
your account.
5
• costs matter. When you choose investments step 3 Determine the Fund Sponsor/s with whom
that have had consistently low management you wish to establish your account(s) and the specific
expenses, you can gain a major head start in funds that you wish to invest. A Fund Sponsor is a
achieving competitive returns. Index funds in company that manages the investment funds where
particular, along with tax advantages and built-in you invest your VIP savings. Visit the Fund Sponsors’
diversification within market segments, offer links listed at the VIP webpage. You may choose to
especially low expenses. Expenses can be found open an account with one or more of the plan’s Fund
on the web site of each Fund Sponsor or in your Sponsors.
fund prospectus.
step 4 Decide on your beneficiaries (i.e., who will
i already haVe a retirement Plan. receive the money in your VIP account in the event
Why use the ViP? of your death) before you begin the process of
establishing your account. You will be asked to provide
The University’s mandatory retirement plans— your beneficiary’s Social Security number as part of
UW Retirement Plan for faculty, librarians, and the VIP’s enrollment application process.
professional staff, and Public Employees’ Retirement
System (PERS) for classified staff—offer a great step 5 Open an account with a Fund Sponsor/s using
foundation for your retirement savings. However, they the application link/s at the VIP webpage. When you
may not be sufficient to meet your total income needs open your account with the Fund Sponsor/s, you will
upon your retirement. The VIP allows you to save be asked to specify initial investment types, such as
more for retirement in a pre-tax retirement savings stock or bonds. Remember that you can change your
plan. fund choices later with your Fund Sponsor/s.
Inflation will not stop working when you do. When you step 6 Upon confirmation of the establishment of
consider how you will pay for life after retirement, your fund sponsor/s account, visit Employee Self
you may wish to supplement your retirement plan Service (ESS) to enroll in the VIP. Identify the Fund
distributions with money you save in the VIP. Use the Sponsor/s and the percent or flat dollar amount that
VIP to maximize your pre-tax retirement account you want to defer.
contributions.
Where can i get more inFormation?
hoW do i enroll in the ViP?
• Fund Sponsor web sites which can be found at:
step 1 Access VIP enrollment at the Benefits website
www.washington.edu/admin/hr/benefits/
www.washington.edu/admin/hr/benefits/vip.html.
retirement/vip.
step 2 Read the online information to learn more and • Through individual meetings with Fund Sponsor
make sure that the VIP’s tax-advantaged savings are representatives. Schedule an appointment at
right for you. www.washington.edu/admin/hr/benefits/
events/events-calendar.html.
6
understanding your inVestments, a glossary
securities—This term includes stocks, bonds, and stable assets.
• stocks—Also known as equities, stocks are securities that
represent ownership of a company or other business enterprise.
• bonds—Also known as fixed-income, bonds are securities that
represent loans to corporations, governments, and other agencies.
• stable assets—Similar to cash in liquidity and price stability,
money market funds are an example. questions & counsel
mutual Funds—Mutual funds offer investment diversification with a UW Benefits & Work/Life, as your VIP Plan Administrator,
small amount of money. When you own one share of a mutual fund it is
like owning an even smaller share of every stock, bond, or stable asset provides general education to help you make choices that
that the mutual fund owns. suit your individual situation and goals. However, Benefits &
Prospectus—A legal document that gives prospective investors Work/Life cannot provide specific investment, tax, or legal
information about an investment, including discussions of the fund’s
investment objectives, and the fund’s risks, expenses, and past advice. If you have specific questions that are not of an
performance. Prospectuses are available from the Fund Sponsor
websites. administrative nature, discuss them with qualified financial,
expense ratio—A percentage of the fund’s average net assets pays tax, or legal counsel. You may make an appointment to visit
expenses such as fund management, marketing, trading and other with a representative from our Fund Sponsors by visiting the
operating costs. The expense ratio is deducted from fund performance.
Benefits & Work/Life website and clicking on Events Calendar.
risks and long-term investing—There are two types of risks to
consider when investing for the long term:
• market risk refers to an investment’s value rise or fall due to
changing economic, political, or market conditions, or due to a
company’s business situation.
• Inflation risk is the risk that the return on your investments will
not keep up with increases in the cost of living.
7
UnIVERSITy OF WASHIngTOn • VOLUnTARy InVESTMEnT PROgRAM • BEnEFITS & WORk/LIFE
CAMPUS BOx 355660 • 3903 BROOkLyn AVE. nE • SEATTLE, WA 98105-6694
View VIP document and summary plan description online
www.washington.edu/admin/hr/benefits/vip.html
UW HR 8/08
Although this booklet includes certain key features and brief summaries of the Voluntary Investment Plan, it does not provide a detailed description.
If you have questions about specific plan details, contact UW Benefits & Work/Life. Details of plan provisions are available upon request,
and the plan document is posted on the Benefits & Work/Life website. Every attempt has been made to ensure the accuracy of this information.
However, if there is any discrepancy between this overview and other plan documents, the plan documents will always govern.
The Universitiy of Washington intends to continue this plan indefinitely, but reserves the right to amend or terminate it at any time,
for any reason. This booklet does not create a contract of employment with the University of Washington.