Current Pension Topics
457(b) Withdrawals Restricted

By JOEL L. FRANK

Q.: My wife works for a non-profit corporation. She is thinking about joining its 457(b) Plan. Can you please furnish us with the distribution rules from such a plan? We were told by our investment guy that they are the same rules that apply to an IRA.

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

I.S.

A.: I urge you to fire your "investment guy" forthwith! Distributions from 457(b) plans maintained by non-profit corporations are only allowed for certain events: (1) at a specific date or according to a fixed schedule specified at the time of the initial deferral election, or (2) after separation from service, with a required 6-month delay for key employees at public companies, or (3) after disability, or (4) after death, or (5) after an unforeseeable emergency (based on a very strict definition that excludes tuition and home purchase, and which requires that no other resources are reasonably available), or (6) after a change in majority ownership or effective control of the corporation/employer sponsoring the plan.

Having said all that, distributions from Individual Retirement Accounts (IRA) can be made at will. This is what makes the IRA super-popular among the American people. If, at the time of the distribution, you are not yet age 59-1/2, your distribution will be subject to an additional tax in the amount of 10 percent of the withdrawn amount. Example: Withdrawn amount is $10,000, so 10 percent of it, or $1,000, is the additional tax. To the $1,000 we must add the ordinary tax, which is, let's say, $1,500, for a total tax bite of $2,500. Result: BAD! - You net out $7,500 - not a good thing. Please use your IRA accumulating funds for their intended purpose - retirement income! The same advice applies to your accumulating funds in your 457(b)/401(k)/403(b) account - please, please do not take loans from these precious accounts.

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Q.: Retirees from a New York State/City agency-may become employed by a New York State "public benefit corporation" while collecting their full New York State /City pension. Is the reverse true: Can a retiree from a New York State "public benefit corporation" become employed by a New York State/City agency while collecting his/her full New York State/City pension?

T.F.

A.: Yes. Please check, however, with the specific New York State/City agency to find out about any agency-specific restrictions or limitations that may apply to the re-employment of retirees from a New York State "public benefit corporation".

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Q.: I am a recent retiree domiciled in New Jersey and collecting a City of New York pension. I was told that my pension is received state income tax-free. Is this true?

C.I.

A.: No. The tax laws of the state where you are domiciled apply. Taxpayers in receipt of a New York State/City pension receive that pension free of New York State/City income tax while they remain domiciled in New York State/City. Inasmuch as you are domiciled in New Jersey, the tax laws of New Jersey apply. In New Jersey, only the first $20,000 of pension income is received free of the New Jersey Tax on Gross Income.