Secure Your Future
More key decisions to make before retirement
Mar 17, 2005 1:00 AM
Recently we discussed the important decision you have to make as to whether to take a terminal leave before you retire or take termination pay after you retire.
But you must make other choices, as well.
So, if you feel that after a career of educating the children of the City of New York it is now time to retire — and July 1, the most common retirement date, is fast approaching — then there are more crucial decisions for you and your tax advisor to mull over. (We’re sure these won’t come as a complete surprise to you because we’re sure that in the last few years as you have contemplated retirement, you have prepared for it by participating in the Ready-or-Not program, you have attended the appropriate Pension Clinic for your tier and had — or are arranging — a final pension consultation. You can have this final consultation in the UFT office most convenient for you by calling the UFT at 1-212-598-6866 to set up the appointment. Now, you have done all these things, haven’t you?)
Here are some additional key decisions that you must make before you retire. You will have to decide whether to:
- make any lump-sum withdrawals;
- remove your tax-deferred annuity, defer removing it or annuitize it;
- take the maximum retirement allowance or select an option.
Lump-sum withdrawal
Before you retire, you have to decide whether to remove some of the money in your Annuity Savings Fund (ASF) account, if you are in Tier I or II, or from your Member Contribution Accumulation Fund (MCAF) account, if you are in Tiers III/IV.
Removing any money from your account will permanently reduce your retirement allowance. However, you will have a lump-sum dollar amount to use for whatever you wish. Members of all tiers may remove money by filing for a loan at retirement — or by opting not to repay a loan taken before retirement. Tier I and II members can also apply to remove excess funds. Any money removed at retirement that has not been taxed will incur a tax liability at withdrawal and the ramifications of this should be understood before any action is taken. Withdrawn taxable funds may be eligible to be rolled over into an IRA or similar account.
In addition to the tax consequences of withdrawal, you must know by how much your annual retirement allowance will be reduced for each $1,000 you withdraw. You can find out this amount at your final consultation.
After you know the facts you can decide whether a greater lifetime retirement allowance is more valuable to you than a lump-sum withdrawal. Some matters you should think about before making this irrevocable decision are:
- How will I minimize any tax consequences?
- Do I need a lump sum for a particular purpose?
- Do I have other resources if I have an emergency in the future?
- Do I wish to use the withdrawn money as part of my estate planning?
- Can I handle the responsibility of investing this money as well as the professionals who invest the money for Teachers’ Retirement System?
TDA
For many members, the largest lump-sum fiscal asset they own is their tax-deferred annuity account. Over their careers, members have deferred taxes and built up a reserve of funds to supplement their Social Security and pension. (Hey, President Bush, working Americans already have the right to participate in a tax-favored supplemental retirement account; they do not need a private individual account under Social Security!)
At retirement, members must decide from among three choices:
- To remove the money from the TRS’ TDA account. If members want some of this money for a current need or to spend it, they must pay federal, state and local income taxes.
If members do not need or want to spend any of this money at this time, the money may be rolled over into another IRS-approved account to defer income taxes.
Way before you retire, you must study carefully what you will do with your TDA if you withdraw it. To avoid the TRS withholding 20 percent of your withdrawal for IRS purposes, you must tell the TRS where you want to transfer your account. Do not make this decision without careful thought and study.
- To annuitize the TDA. When you elect to do this you give up your right to the lump-sum value of your TDA in exchange for a second retirement check each month for the rest of your life.
An annuity is a type of investment that guarantees a stream of payments for a lifetime instead of a lump sum. The dollar amount of your payment is determined by the value of your TDA account, your age and whether you want the TDA to provide for heirs and beneficiaries or cover just your lifetime. At your final consultation, your consultant can estimate the amount of your TDA benefit. TRS’ TDA annuity is excellent investments for members whose goal is the highest available income for life. Do not make this decision without careful thought and study.
- To defer removing the TDA from TRS and leave it for continued investment. So many decisions have to be made at retirement, which is a very stressful lifetime event, that the UFT has had enacted into law the right of a member to defer making a final decision on how to invest this large financial asset.
By deferring the withdrawal of the TRS’ TDA account, members could use the time after retiring to decide what to do with the TDA. Members can rest assured knowing that in the deferred status, they control the investment decisions on this money. They may participate in any of the TRS’ investment choices and their accounts are protected for any beneficiary(ies).
Many members who elect to defer the removal of their TDAs — and the vast majority of all TDA participants do select deferral at retirement — never opt to remove the account or annuitize it. While that decision can be made at any time, most TDA participants feel secure in the fact that their TDA accounts are being invested by the professionals hired by the TRS. Perhaps that is why this is the most common of the three choices made by retirees.
If you prefer to leave your TDA at the TRS for continued investment, Uncle Sam requires that when you reach age 701/2 you must begin making Required Minimum Distributions (RMD). The TRS will calculate how much the IRS requires you to remove and send it to you each year.
Another decision you must make at retirement is selecting the Maximum Retirement Allowance or some Options. This issue will be discussed in a future column.
Important dates
April 29: This is the date by which the TRS must receive a Qualified Pension Plan (QPP) Investment Election Change Form (MA 7) from Tier I/II members in order to effect investment election changes on July 1.
June 1: This is the date by which the TRS must receive a TDA Investment Election Change Form (TD 45) or an online election in order to effect TDA investment election changes on July 1.
“On retirement” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877).
