Current Pension Topics: Pensions Taxable Outside N.Y.

Current Pension Topics
Pensions Taxable Outside N.Y.

By JOEL L. FRANK

Q.: I plan to move out of New York after I retire on my public employee pension. As an out-of-state resident, do I have to pay taxes on my pension?

M.R.

A.: Your entire pension is tax-exempt in New York no matter where you live. You need, however, to check with the taxing authority of the state where you will be residing to determine the taxability of your pension income in that state. Unlike New York, most states tax public employee pensions at least partially. Remember, your entire pension is subject to Federal taxes.

Q.: I will be retiring from city service in 2008 at the age of 52. I plan on drawing down my four IRAs immediately in order to supplement my pension. I know I will have to pay income tax on the withdrawals, but is there a way not to pay the 10-percent penalty?

C.F.

A.: Yes there is. Internal Revenue Code Section 72(t) says pre-age 59-1/2 withdrawals from an IRA will be exempt from the 10-percent penalty tax if they are part of a distribution plan that provides for Substantially Equal Periodic Payments (SEPP) that will last for at least five years or until age 59-1/2, whichever is the longer period of time. So, beginning at age 52, your SEPP Plan must last 7-1/2 years or until you reach age 59-1/2. Only at that point may you stop making annual SEPP withdrawals. If you do not make the annual withdrawals that are dictated by the SEPP plan during the 7-1/2-year period, you will not only have to pay the 10-percent penalty tax on the skipped withdrawal, but on all withdrawals from day one. This results in a "busted" SEPP plan. Because of the possible adverse tax consequences involved in a SEPP plan, I would advise you to fully understand it now and not wait until you retire next year. I recommend that you log onto the following Web site and read and learn all about SEPP: www.72t.net/Default.aspx . Feel free to write to me again next year before you embark on your Section 72(t) SEPP plan.

In closing, I would urge you to open up a New York City Employee Individual Retirement Account (NYCE IRA) and roll over your four IRAs into it. Having one consolidated IRA will greatly simplify your financial life. The NYCE IRA is made available to all city employees and retirees by the Deferred Compensation Plan of the City of New York. You may reach them at: www.nyc.gov/html/olr/html/deferred/dcphome.shtml .

Q.: My friend is employed by a city with a very expensive 457(b) plan. He would like to do a Revenue Ruling 90-24 Transfer to another 457(b) investment. I know Revenue Ruling 90-24 allows transfers from 403(b) investments to other 403(b) investments, but I was wondering if it can also be used to transfer his 457(b) investment to another 457(b) investment, preferably with Vanguard.

P.D.

A.: No, it may not. Revenue Ruling 90-24 pertains only to Section 403(b) investments.

The 403(b) investment is titled in the name of the employee. There is no plan and no plan trust established by the employer to accept salary deferrals for investment. The arrangement is between the investment provider and the employee. Because the investment is owned by the employee/investor, it may be transferred by the employee/investor to another 403(b) investment, regardless of age or employment status.

With the 457(b), the investment is titled in the name of the plan trust established by the employer to accept salary deferrals for investment. Any funds transferred would have to go into a successor plan trust. But there is no successor plan trust if you are still employed. So, in order for your friend to move his 457(b) investment to another 457(b) investment, he must no longer be employed by the employer that sponsors his 457(b) plan. Upon severance of employment, he is entitled to a distribution. At that point, he may roll over his 457(b) to an IRA, or should he subsequently become employed by an employer that offers a 457(b) plan, he may roll his 457(b) investment over to that plan.

This is not good news for people who have high-cost 457(b) plans. Your friend should with other colleagues approach the plan's administrator and tell him/her about low-cost investing. Use the Deferred Compensation 457(b) and 401(k) Plan of the City as a model plan. While fighting for change, I would advise your friend to stop all contributions to his expensive 457(b) plan. In its place, tell him to contribute to an IRA with Vanguard.

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