Current Pension Topics
Repaying Loans in Retirement

By JOEL L. FRANK

While working, you pay off a retirement system loan through convenient payroll deduction. This all changes when you retire.

Because the law doesn't provide for a continuation of the loan payments through a retirement payroll deduction you are given a choice: pay off the loan balance in a lump-sum (write a personal check) or report the outstanding loan balance as a taxable distribution on your tax return.

If you do not have the loan balance in cash, then you have no other choice but to report the outstanding loan balance as a taxable distribution on your tax return. If you do have the loan balance in cash, then you have a decision to make: Pay back the retirement system in a lump sum (write a personal check) and receive a larger annuity, or open up a retirement rollover account for the amount of the outstanding loan balance. I recommend you open up a retirement rollover account.

Regardless of what you do (or have done) with the outstanding loan balance (or new loan), the annuity portion of your retirement allowance is simply reduced by the annuity income value of your loan based on your age at retirement. This permanent reduction is not a penalty, because you have received a lump sum of cash in return for accepting a smaller annuity.

Moreover, you are not paying back the loan for as long as you live. Example: Assume a teacher takes out a $50,000 loan in conjunction with his/her retirement at age 60. If left with the Teachers' Retirement System, the $50,000 will generate a retirement income of 0.08935 X $50,000 or $4,468 annually. If the $50,000 is withdrawn in cash the annual annuity income will be reduced by the $4,468.

This is a simple business transaction. You need to ask yourself: Do I voluntarily want to have $50,000 in cash or do I want to voluntarily annuitize my $50,000 with the TRS? Regardless of your decision, you are receiving fair economic value. To repeat, there is no penalty and you are not paying off the loan for the rest of your life should you retire with an outstanding loan balance or a new loan.

A recently passed law permits the New York City Employees' Retirement System retirees to pay back their loans in a lump sum during retirement and have their retirement allowance increased by the same annuity income they would have received if they never took out the loan in the first place.

The annuity income rate, however, is much higher for a 70-year-old ($0.11903 per $1.00) than a 60 year old ($0.09775 per $1.00) but the 70-year-old retiree will only see his retirement allowance increased by the rate for a 60-year-old (assuming he/she retired at age 60).

This law is a retiree rip-off. Please don't fall for it. It was designed to benefit the city and only the city. If you have the money to pay back the loan, invest all of it in a Target Date no-load mutual fund and make withdrawals based on your life expectancy.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.