On May 3, I first wrote about the fact that the State Comptroller, as sole trustee of the New York State and Local Retirement System, does not seem to know that loans taken in conjunction with retirement are eligible for rollover treatment.
The statutory right to effectuate a rollover of a loan was first codified by the Unemployment Compensation Amendments Act of 1992. For nearly three decades, members of the state system have been denied their right to establish an IRA with their contribution account.
The Comptroller does exhibit a keen understanding of the rollover law as it pertains to the following circumstances:
- Upon resignation and membership withdrawal, he sends the member's contribution-account balance directly to the IRA designated by the member.
- In conjunction with retirement, he sends partial lump-sum distributions directly to the IRA designated by the member.
- He sends a refund of excess directly to the IRA designated by the member.
I recently spoke with six soon-to-be retirees. The Comptroller has told each of them that loans cannot be rolled over. I told them that the Comptroller was in violation of Federal tax law. I advised them to apply for the loan, and as soon as the check clears, write a check, for the same amount, and send it off to the IRA of their choice. Soon-to-be-retirees, desirous of establishing an IRA with their contribution account, must follow these steps until such time as the Comptroller sees the light.
The state's seven other public-sector retirement systems know that a loan taken in conjunction with retirement is eligible to be rolled into an IRA designated by the member.
Example A. As an active employee, Bill has the right to take a maximum loan of 75 percent of his contribution account balance. Assume a balance of $50,000. Bill takes out a loan for $37,500 and pays it back by convenient payroll deductions.
Example B. The facts are the same as in Example A, but Bill is about to retire and must decide how to use his $37,500. He has three choices: 1. Accept an unreduced pension by leaving the $37,500 with the System. 2. Accept a reduced pension by withdrawing the taxable $37,500. 3. Accept a reduced pension by withdrawing the $37,500 and roll it into an IRA. Taxes are deferred until such time as funds are withdrawn from the IRA. Numbers 2 and 3 are referred to as a "Plan Distribution" because Bill has agreed to accept a reduced pension.
Note: When an eligible rollover distribution is sent to the member rather than to the IRA, 20 percent must be withheld for Federal income tax.
Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at firstname.lastname@example.org.
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