Secure Your Future

A key decision you must make when you are set to retire

Mar 16, 2006 2:19 PM

In the last issue we informed retiring members that it was important to make an appointment for a final pension consultation sooner rather than later. Call the UFT Pension Department at 1-212-598-6866 to make an appointment in the borough office most convenient for you.

You recently received your Quarterly Account Statement (QAS) for the last quarter of 2005. You should review it carefully and bring it, along with your Annual Benefit Statement (ABS), to your final consultation. If you did not receive your QAS, check with the Teachers’ Retirement System because it may not have your home address.

Now that you have decided to retire at the end of this semester, you will have to make some very important decisions including one about what is generally a UFT member’s largest fiscal asset. Some of these decisions are irrevocable and you should give them a long, hard look.

Most people retiring at this time have participated in the UFT’s Pension Clinic, had a consultation or two over their career with a UFT pension consultant and have discussed retirement with their spouse, signo (the new term coming into the vocabulary that is short for significant other) or trusted confidant. Hopefully, you regularly read the “On Retirement” column in the New York Teacher. Some, on the other hand, will have a steep learning curve because they have made the decision to retire almost on the spur of the moment.

Earlier this year, this column discussed the matter of taking the maximum retirement allowance or an option to provide for a beneficiary or beneficiaries. At the final consultation, you will receive estimates of your retirement allowance under some appropriate choices. This decision is generally irrevocable.

Lump-sum withdrawal?

In conjunction with that decision, you have to make a decision on removing a lump sum from your Qualified Pension Plan (QPP) account or collecting a larger retirement allowance.

Tier I/II members are eligible to remove any possible excess funds from their account in a lump sum. All TRS members have the right to take a loan at retirement and such a loan is equivalent to a lump sum withdrawal since there is no repayment required.

We are frequently asked by members about the advisability of removing funds in a lump sum at retirement. Contrary to the advice given by vendors of mutual funds, insurance and other financial products, we have found there is no one answer that fits all situations. Members considering removing funds should ask themselves several questions, such as:

• Do I need the money at this time?
• Can I invest the money better than the TRS can?
• How much will my retirement allowance be reduced if I remove the funds?
• What are the tax consequences of removing the funds?
• Am I taking an option or am I going to take maximum retirement allowance?
• Do I wish to protect the funds involved for my heirs or do I wish to collect the highest retirement allowance available?

After considering these questions, most members have no difficulty making the decision that is best for them. Only you know whether you are an astute investor and whether you intend to take an option. However, we can point out some facts about the effect of a withdrawal on your retirement allowance and possible tax consequences.

The retirement allowance is funded by employee and employer contributions and the investment returns earned by these contributions. Whether you remove funds or not, the employer-funded portion of the retirement allowance will be paid. Only the member-funded portion is affected if you remove funds. The amount of reduction depends on age and ranges from about $80 per year per $1,000 withdrawn for a 55-year-old to about $130 per year per $1,000 withdrawn for a 71-year-old retiree. You will learn your figure at your final pension consultation.

Remember, the reduction in retirement benefits based on the withdrawal of funds is permanent and the withdrawn funds cannot be paid back. The decision on withdrawal of funds may be made up to one business day before your date of retirement.

Another consideration in the decision to remove funds is taxation.

The following information on tax consequences is based on our understanding of the laws involved and should not be considered legal or tax advice. For such advice you should consult your legal or tax advisor or the IRS.

Any money withdrawn that was contributed by a member and has already been taxed will not have any further tax consequences.

Money withdrawn that was contributed pre-tax by a member or was added to the account by investment earnings is subject to income tax. If a member removes this money for immediate use or just to put into a non-tax-favored investment account, taxes must be paid in the year of removal. In fact, the IRS requires the TRS to withhold 20 percent of the withdrawn amount for taxes if the withdrawal check is made out to the recipient.

If the withdrawal is otherwise taxable and is not meant for immediate use, it can be rolled over into an IRA or other tax-deferred vehicle. Taxes will then be deferred until the money is withdrawn from the new investment. The TRS issues a 1099 form to members who have removed taxable funds and reports the event to the IRS at the end of the tax year in which the withdrawal occurs. TRS will send the funds directly to the new investment company and will not withhold the 20 percent for taxes.

In a future column, we will discuss the decisions you may make with respect to your TDA at retirement.

TRS reminders

• If you are a new employee, have you filed your TRS enrollment forms? Do you participate in the TRS TDA program?
• Almost 10,000 TDA members have no designation of beneficiary on file. Have you filed yours?
• Almost 36,000 members have not filed a QPP designation of beneficiary. Have you filed yours?
• Almost 28,000 members have no date-of-birth information at the TRS. Have you filed yours?
• Does the TRS have your current home address?

If you answered no to any of the above questions, contact the TRS at 1-888-8NYCTRS or speak to a UFT pension consultant at your local UFT borough office.