Current Pension Topics
Rolling Over Inheritance IRAs

By JOEL L. FRANK

The Pension Protection Act of 2006 (PPA) has extended a valuable Individual Retirement Account (IRA) rule to account-holders of employer-sponsored retirement plans authorized under Internal Revenue Code Sections 401(k), 403(b) and 457(b).

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.

Effective Jan. 1, 2007, non-spousal beneficiary(ies) of such accounts will no longer be required to cash out their balances (and pay the tax due) within 1-5 years of the death of the plan participant. Starting next year, nonspouse beneficiary(ies) will be able to roll their inheritance over to an "inherited IRA" and stretch out taxable withdrawals based on their own life expectancy. Example: A 457(b) plan participant designates his/her child to be the beneficiary of his/her $500,000 account. Upon the participant's death, the child is 33 years of age. Based on published IRS tables (Publication 590) he/she will be required to withdraw $10,000 the first year and pay $180 in Federal income tax (assuming he/she has no other taxable income). The same table will be used in subsequent years in order to determine the annual amount that must be withdrawn. More, but not less, than the required amount may always be withdrawn. Most importantly, the balance of the account will continue to grow on a tax-deferred basis so long as the child (or other non-spousal beneficiary) keeps the money in the tax protective shell of his or her "inherited IRA."

In my column of Sept. 22, I erroneously asserted that Tier 1 and 2 members of the New York City Employees Retirement System (NYCERS) and the Teachers' Retirement System of the City of New York (TRS) may borrow money from their respective retirement systems just as they would from a bank. While this is true for members of TRS, it is not the case with NYCERS. When a Tier 1 or 2 member of NYCERS takes out a loan, the member's Accumulated Deductions account is reduced by the loan amount. I apologize for any inconvenience this may have caused.

After Ms. Susan Sanders, a pension benefits attorney in private practice, brought this fact to my attention (thank you Ms. Sanders), I researched the NYCERS Web site in an attempt to locate this critically important information. Karl Bloom, Deputy Director, Operations of NYCERS helped me with the research (thank you Mr. Bloom) and agrees with me that this information is not adequately disclosed to Tier 1 and 2 members. NYCERS needs to disclose to the members of Tiers 1 and 2 not only the fact that their Accumulated Deductions account is reduced by the amount of the loan, but that even if the loan(s) are always and completely paid back in a timely fashion, the resulting Accumulated Deductions account balance is smaller than it would be if the member never borrowed from the account. This is because the amount(s) borrowed is removed from the Accumulated Deductions account and is, therefore, no longer being credited with 8.25-percent guaranteed interest. The smaller account balance results in a smaller annuity income portion to one's retirement allowance or, in the alternative, a smaller loan amount for one who would like a lump-sum distribution and/or a rollover amount in conjunction with retirement.

Just as I have advised owners of all pre-tax accounts (401(k), 403(b) and 457(b)) not to borrow from their accounts, I advise Tier 1 and 2 members of the NYCERS not to borrow from their Accumulated Deductions account until they retire. Upon retirement, I advise maximizing a loan distribution from one's Accumulated Deductions account for lump-sum withdrawal and/or rollover purposes.