Q.:  At retirement, is it a good idea to take a Final Withdrawal (FW) from the retirement system?   F. G.

A.:  Yes, it is. In order to receive the maximum FW, your retirement account must have no outstanding loans. Your FW is limited to 75 percent of your retirement savings account (90 percent for cops and firefighters). First and foremost, the FW should be used to pay-off all outstanding debts, insofar as you should be debt-free at retirement (excluding the mortgage on your primary residence). When used in this fashion, the FW is taxable income in the year of the FW.   

Assuming you do not need the FW to pay-off debt, the FW is to be used to promote your retirement security. This is accomplished by executing a rollover to a Traditional IRA or a Roth IRA. 

Rollovers to a Traditional IRA are tax-free at retirement but will be, starting at age 72, subject to annual taxable Required Minimum Distributions (RMDs) for the remainder of your life. These RMDs tend to increase as we age. The alternative is to, at retirement, roll over the FW to a Roth IRA, which is a taxable event in the year of the FW. The Roth IRA, however, is not subject to taxable RMDs at age 72 and qualified distributions from the Roth IRA are tax-free to the Roth IRA owner and to the spouse-beneficiary of the Roth IRA owner.

Of Note: FWs, regardless of what you do with the withdrawal, will permanently reduce your guaranteed retirement allowance. This is a fair trade-off because, should you not take a FW, the retirement system will simply give you more lifetime income, which ceases upon your death or the death of your joint-annuitant.  When the FW is rolled into a Traditional IRA or a Roth IRA, you get a double-edge saw: retirement income and an opportunity for investment growth. 

As always I welcome your questions.


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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