Current Pension Topics
Mutual Fund Deadline is Near

By JOEL L. FRANK

Alert: In less than three weeks, Revenue Ruling 90-24 is set to expire. This ruling authorizes you to transfer your commission-based 403(b) variable annuity or mutual fund to a no-load (no commission) investment menu like Vanguard. After Sept. 24, you will have to get your employer's written approval to effectuate the transfer to a mutual fund of your choice. If you are not sure if you should take advantage of Revenue Ruling 90-24, please call me. Time is of the essence!

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

Last week I wrote about how the state and city cheat themselves by treating the voluntary Teachers' Retirement System 403(b) Investment Plan as a "pension or retirement system." The 8.25-percent interest rate, which is constitutionally mandated for the savings accounts of members of Tiers 1-2 of the TRS "pension or retirement system" is also applied to the savings accounts of members of the voluntary 403(b) Investment Plan. Such application reveals a complete lack of understanding of what constitutes a "pension or retirement system" under Article V, Section VII of the New York Constitution, commonly referred to as the "impairment clause."

The clause states: "After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired."

Because it is a supplemental/voluntary savings plan, the TRS 403(b) Investment Plan is clearly not covered by the "impairment clause" of the Constitution. It is the benefits derived from the "pension or retirement system" that is covered by the "impairment clause." This distinction is elementary to all but the Trustees of the TRS.

Invariably, when there is an "impairment clause" challenge, it is one that is financially hurtful to the member of the "pension or retirement system." Not in this instance. The misapplication of the impairment clause to the voluntary TRS 403(b) Investment Plan has cost the state's taxpayers $250 million dollars annually in interest payments that are not constitutionally mandated. This is illegal and requires an immediate legislative remedy.

But there is more to this story. Pensions of New York State, local governments and the Federal government are received tax-free by residents of New York. This means the pension a New York resident receives from the TRS "pension or retirement system" is 100-percent exempt from New York State, City of New York and City of Yonkers income tax. When it comes, however, to the income derived from voluntary supplemental investment plans i.e., IRA, 457(b), 401(k) and 403(b), there is only a partial exclusion of $20,000. This means if you withdraw $50,000 from one of the aforementioned accounts, $30,000 is taxable income, while $20,000 is tax-free. So where's the beef? The beef lies in the fact that the entire $50,000 withdrawal from the TRS 403(b) plan is received tax-free. How could that be? Because withdrawals from the TRS 403(b) plan are improperly treated as pension income and not 403(b) income. This means if a resident of New York receives a TRS pension of $75,000 annually and withdraws another $50,000 annually from his/her TRS 403(b) account, he/she pays no tax on $125,000 of retirement income, when we all know he/she should be paying tax on $30,000.

Boy, does it pay to be a member of the TRS 403(b) Investment Plan! You reduce your current tax bill by contributing pre-tax dollars to an investment plan and in violation of Article V, Section VII of the Constitution you get an 8.25-percent interest rate applied to this voluntary pre-tax investment account, a rate not available to members of the City's Deferred Compensation Plan, and then during retirement, the New York Tax Collector tells you that the payments you receive from your pre-tax TRS 403(b) account are entirely exempt from the State, City of New York and City of Yonkers income tax. This is clearly illegal and must be remedied immediately. What are you going to do about it, Governor Spitzer and Mayor Bloomberg?

Q.: I am a Teacher in Garden City. I have a 403(b). Should I transfer it under Revenue Ruling 90-24?

S.M.

A.: You should, provided it is a commission-based variable annuity or mutual fund. See my alert at the beginning of the column. Do nothing if it is a no-load investment i.e.; Vanguard, T. Rowe Price, Fidelity or TIAA-CREF. For clarification, please call me prior to Sept. 24.