The vast majority of city employees do not contribute the maximum allowed to the Deferred Compensation 457(b) Plan of the City of New York.
This underfunding need not be permanent. The funding level may be improved by taking advantage of the DAR provision of Section 457(b) of the Internal Revenue Code. DAR, which stands for Deferral Acceleration for Retirement, allows a participant to contribute twice the annual maximum for each of the three years prior to retirement.
Calculation: regular maximum of $19,500 X 2 = $39,000 per year X 3 years = DAR contribution of $117,000. DAR is available only to those who have not contributed the maximum to the 457(b) Plan during their city service. If you have always maximized your contributions, you're not eligible for DAR.
If you cannot afford to contribute the full DAR, just contribute as much as you can. DAR is not available under Sections 403(b) or 401(k) of the Internal Revenue Code.
Q.: I want to cash in a small IRA in the amount of $15,000. I was told that 20 percent will be deducted for income tax and the check will be for $12,000. I find this unfair. What is your opinion? S.F.
A.: I do not agree with you. You never paid income tax on the contributions you made to the IRA, so now that you want to cash it in, the Federal government is entitled to collect the tax. Rather than assume you will voluntarily pay the tax in a timely manner, the IRS requires the IRA custodian to withhold an estimate of the tax you owe.
This estimate is fixed at 20 percent of the $15,000 distribution, or $3,000. You will, therefore, receive a check for $12,000. You will also receive notice from the custodian that $3,000 was withheld for income tax. This information will assist you or your professional tax-preparer in the filing of your income-tax return. Additionally, if you are younger than 59.5, a penalty tax is due in the amount of $1,500 (10 percent X $15,000). You might need $15,000, but you only get $10,500.
If, on the other hand, you wanted to change the custodian of your IRA, you would fill out the required paperwork requesting that the "eligible rollover distribution" of $15,000 be sent directly to the new IRA custodian. The check for the $15,000 would be made payable to the new custodian for your benefit. The custodian will send you a confirmation notice that the money was received and invested per your specific instructions. This transaction is known as a Direct Rollover or Direct Transfer. If, by chance, you receive the check made payable to you, do not deposit it. Return it to your current custodian and remind them that you requested a Direct Rollover, which means the check for $15,000 is to be made payable to the new custodian for your benefit.
We will soon be embarking on the third decade of the 21st century, and the New York City Employees' Retirement System still does not get it.
Who follows a stricter standard when it comes time to prove an on-the-job-incurred disability, Social Security or NYCERS? Social Security has the higher bar. It, therefore, stands to reason that if you qualify for a Social Security disability pension, you also qualify for a NYCERS disability pension. The Social Security standard requires you to show that you are not able to discharge the duties of your current job or any other job because the severity of your disability is such that it will last for at least 12 months and may very well end in your death. If this standard is met, the injured city employee is granted a Social Security disability pension.
That being said, how is it possible that the NYCERS, with its lower disability standard, rejects the employee's claim for a NYCERS disability pension? How is it possible that after careful review of the same medical records, the NYCERS Medical Board orders the applicant to return to work? How could it issue a return-to-work order when it knows the employee has been granted, based on a higher standard, a Social Security disability pension?
Should the employee return to work, his/her Social Security Disability Pension stops (he/she also risks further injury), and if he/she does not return to work, he/she is removed from the city payroll. The employee is between a rock and a hard place.
Unions: What say you? See: Flagman Struck by Train Still Denied PTSD-Related Pension by NYCERS. The Chief, Aug. 13, 2020.
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 email@example.com.
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