Current Pension Topics
Roll Over to City IRA Plan

By JOEL L. FRANK

Q.: My wife and I retired as Tier 1 city Teachers in July 2001. Right or wrong, we were advised, at that time, to invest the Teachers' Retirement System Annuity Savings Account distribution in a variable annuity IRA. The cash surrender value penalty period of seven years will finally end in August. Together we invested $92,000 in these commission-based variable annuities. The accounts are now worth about $127,000. Should we get out of this investment in August? If so, what should we be doing with this money?

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.

M.L.

A.: Absolutely! I advise you to contact the insurance company in late June in order to get the paperwork started prior to the last day of the seven-year period. I strongly advise you to roll these high-cost investment products over to the New York City Employee IRA Program (NYCE IRA) administered by the Deferred Compensation Plan of the City of New York. Invest all of the money in the appropriate Pre-Arranged Portfolio. The needed information and forms may be downloaded at: http://nyc.gov/html/olr/html/nyceira/nyceira_home.shtml.

Caution: (1) If you like paying commissions to acquire an investment, then go right ahead and buy commission-based variable annuities/mutual funds from an individual securities salesperson. If you abhor such products, as I do, then make sure you are buying no-load (no commission). In my view, city workers and retirees need only one investment product provider/financial services firm. This public-sector agency goes by the name of the Deferred Compensation Plan of the City of New York.

(2) Re: Deferred Compensation Plan. Some of you are unknowingly hurting yourselves. You are not getting the full value of Pre-Arranged Portfolio investing if you are also investing, at the same time, in one or more of the Core investment options. You have two choices: (a) Design your own diversified investment program using only the core investment options and invest all of your money in this program, or (b) invest all of your money in the appropriate Pre-Arranged Portfolio. I would go with (b).

Q.: I have the variable annuity 403(b) investment with the Teachers' Retirement System of the City of New York. The rule states that one avoids the 10-percent penalty tax if separated from service at age 55 and retired. Is that retired from teaching or from full-time work? Can I retire from teaching and get another job without any impact on my withdrawals from my 403(b) Plan?

E.C.

A.: "Retirement" means one is not engaged in gainful employment (income from wages, salaries, tips, self-employment). "Retirement" means your only income is from sources associated with prior gainful employment (annuities, IRA, pension, Social Security, 457(b), 401(k), 403(b), etc).

Having said that, you may still be gainfully employed and make 403(b) plan withdrawals without being subject to the 10-percent Federal excise tax provided you severed employment, from the employer sponsoring the 403(b) plan, during or after the year you attained age 55. Regardless of your subsequent employment status, all future withdrawals from the 403(b) plan will be exempt from the 10-percent Federal excise tax. You may go to work full- or part-time (public- or private-sector) and continue to have your 403(b) plan withdrawals exempt from the 10-percent tax. You may even go to work for another employer/school district that sponsors a 403(b) plan with the same result. However, you may not withdraw any money from the second 403(b) plan (assuming you contribute) until the earliest of: attainment of age 59-1/2, disability, severance of employment or hardship. I trust I have helped you. Of Note: The same rule applies to the 401(k) plan.

Q.: My school district (upstate) sponsors a 457(b) plan and a 403(b) plan. I am currently employed and desire to roll over the 457(b) account balance to the 403(b) plan. Do the rules allow me to do this?

P.A.

A.: No, they do not. You must be entitled to a distribution from the 457(b) Plan before a rollover contribution may be effectuated from a 457(b) plan to another eligible plan, i.e.; 403(b). You will first be entitled to a distribution from the 457(b) plan upon severance from employment. So under the current rules/regulations, you must wait until you sever employment before you can effectuate the distribution and rollover contribution from the 457(b) plan to the 403(b) plan. I trust this helps you.

Assuming you desired to roll over your 403(b) account balance to the 457(b) plan, you may do so upon satisfaction of the earliest event: Severance from employment, disability or attainment of age 59-1/2.

Of Note: If you have designated someone other than your spouse to receive retirement account death benefits, please tell these potential recipients that they are permitted to roll over the death benefit to their own "Inherited IRA". This includes death benefits from any qualified pension/retirement plan (401(a), 457(b), 401(k) or 403(b)). In this way, the recipient can continue to grow the investment, tax-deferred, while taking Required Minimum Distributions based on his/her life expectancy.