Current Pension Topics: Roll Over While Withdrawing

Current Pension Topics
Roll Over While Withdrawing


Q.: I am 56 and about to retire. I will be rolling over my final pension "loan" distribution in the amount of $56,000 to my 457(b) with a current balance of about $151,000. My New York City Employees' Retirement System pension will not be enough income, so I plan on making monthly withdrawals of $700 from the 457(b) account. Is this a good idea?

P.A.

A.: It's a good idea provided you use the permissible accounts. The 457(b) Plan accepts rollovers only from other 457(b) plans.

Having said that, you need to open up a special 401(k) rollover account with the Deferred Compensation Plan of the City of New York (DCP) and roll over the final pension loan distribution of $56,000 to it. For consolidation purposes, I suggest you also roll over your 457 balance to this special 401(k) rollover account. The new 401(k) rollover account ($207,000) will consist of 457 funds ($151,000) which have always been exempt from the 10-percent penalty tax and the rollover amount ($56,000) from a qualified 401(a) plan (NYCERS). Because the rollover amount was distributed from NYCERS after you separated from service during or after the year you turned age 55, any taxable withdrawal attributed to the rollover funds is also exempt from the 10-percent penalty tax. This makes the entire 401(k) rollover account exempt from the 10-percent penalty tax. Please invest the entire account in the Target Fund. You will now instruct the Plan Administrator to direct deposit $700 per month to your checking account.

Tip: Any 401(k) and 403(b) withdrawal made after separation from service during or after the year you turn age 55 is exempt from the 10-percent penalty tax. Example: Ralph is 55 and will be retiring on July 1, 2007. He has $150,000 in his 401(k) account. He plans to make a withdrawal of $10,000 in August 2007. The $10,000 is exempt from the 10-percent penalty tax. Remember, though: the $10,000 is subject to income tax on the Federal level at ordinary rates.

Following are some other exemptions from the 10-percent penalty tax on withdrawals from 401(k) and 403(b) accounts.

• Withdrawals made as a part of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary.
• Withdrawals made because you are totally and permanently disabled. - Withdrawals made because of your death.
• Withdrawals made to an alternate payee because of a Qualified Domestic Relations Order.
• Withdrawals for medical expenses in excess of 7.5 percent of your adjusted gross income whether or not you itemize your deductions for the year.
• Withdrawals to pay for an Internal Revenue Service levy against your account.

Tip: If you retire prior to age 59-1/2 and roll over your 401(k) and/or your 403(b) to an IRA, any withdrawals from the IRA prior to age 59-1/2 will be subject to the 10-percent penalty tax.

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 .