Q.: I'm a member of the Teachers' Retirement System of the City of New York. I will be taking a maximum Final Distribution from my annuity savings account when I retire next year. The funds will be taxable because, rather than deferring the tax by rolling the money into to a traditional IRA, I plan to convert (rollover) the distribution into a NYCE Roth IRA. I know I must pay Federal income tax on the entire amount. How will the State of New York treat this transaction? H.G.

A.: Roth conversion income is taxable as "Pension and Annuity Income" by the State of New York. You will be taxed based on the pension and annuity income exclusion of $20,000. Example: $35,000 is converted to a NYCE Roth IRA less the $20,000 exclusion = a taxable amount of $15,000. Note: If the Roth conversion is less than $20,000 the entire conversion will not be taxed by the State of New York.

The city (taxpayer) can satisfy all of its borrowing needs at an interest cost of about 1.5 percent. So why does the city borrow the member's Accumulated Deductions/Annuity Savings at a minimum interest cost of 5 percent? An interest-bearing savings account is hardly the optimum way to save for retirement. The mandatory pension deduction is crying out for alternative investments.

With that said, there are two portions to the "retirement allowance": An annuity portion funded with the member's accumulated deductions/annuity savings, and a pension portion funded by the city.

PROPOSAL: The city's five Qualified Pension Plans will become non-contributory by eliminating the annuity portion of the retirement allowance. Rather than contributing to the Qualified Pension Plan, the member will be required to contribute, at his or her full pension rate, to the Deferred Compensation Plan of the City of New York. This will be a grand-slam for both parties. The city (taxpayer) will save billions in interest payments by no longer borrowing the members' Accumulated Deductions/Annuity Savings, and the Qualified Pension Plan member will gain access to an excellent investment choice menu.


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 rollover@optonline.net.


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