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ERI Fact Sheet

Taxability and Rollover Options
for Your $500 Monthly
Retirement Incentive Payment

Public Employees' Retirement System (PERS) and
Teachers' Pension and Annuity Fund (TPAF)


IMPORTANT NOTICE:
THE FOLOWING INFORMATION APPLIES ONLY TO THE $500 MONTHLY RETIREMENT INCENTIVE PAYMENT

Under the Early Retirement Incentive Program, Category 3 retirees will receive an incentive payment of $500 per month for 24 months in addition to their regular monthly retirement allowance. The $500 per month incentive is paid separately from the regular retirement allowance and is also subject to different treatment under federal tax law.

The $500 per month incentive payment is considered an eligible rollover distribution. As such, you can elect to have this benefit:

- Directly rolled over to a traditional individual retirement account (IRA) or another eligible employer plan; or

- Have the benefit paid to you after federal tax is withheld.

This publication outlines some important points you should consider when choosing between rolling over or receiving payment of your $500 monthly incentive.

WHAT IS A DIRECT ROLLOVER?

You can choose a direct rollover of your $500 retirement incentive payment. In a direct rollover, your distribution is paid directly from the retirement system to an IRA or another qualified employer plan that accepts rollovers. If you choose a direct rollover, you are not taxed on a payment until you later take it out of the IRA or the other eligible employer plan. You are free to change your election for any later payment in the series by filing a new Rollover Election Form which is available from the Division of Pensions and Benefits.

Direct Rollover to a Traditional IRA

You can open a Traditional IRA to receive the direct rollover. If you choose to have payment made directly to an IRA, contact the IRA sponsor (usually a financial institution) to find out how to have your payment made in a direct rollover at that institution. If you are unsure how to invest your money, you can temporarily establish an IRA to receive payment. In choosing an IRA, you may wish to consider whether the IRA you choose will allow you to move all or a part of your payment to another IRA at a later date without penalties or limitation. See IRS Publication 590, Individual Retirement Arrangements, for more information on Traditional IRAs including limits on how often you can roll over between IRA accounts.

Direct Rollover to Another Employer's Plan

If you are employed by a new employer that has an eligible employer plan and you want a direct rollover to that plan, ask the administrator of that plan whether it will accept your rollover. If your new employer's plan does not accept rollovers, you can choose a direct rollover to an IRA.

A qualified employer plan is not legally required to accept a rollover. Before you decide to roll over your payment to another employer plan, you should find out whether the plan accepts rollovers and, if so, the types of distributions it accepts as rollovers. If an employer plan accepts your rollover, the plan may restrict subsequent distributions of the rollover amount or may require your spouse's consent for subsequent distribution. A subsequent distribution from the plan that accepts your rollover may also be subject to a different tax treatment than distributions from this plan. Check with the administrator of the plan that is to receive your rollover prior to making the rollover.

WHAT HAPPENS IF I HAVE THE PAYMENT PAID TO ME?

If you have the payment made to you, the entire $500 payment is subject to 20 percent ($100) income tax withholding. This is sent to the IRS. The distribution is taxed in the year you receive it unless, within 60 days, you roll it over to an IRA or another eligible employer plan that accepts rollovers.

WHAT IF I HAVE THE TAXABLE DISTRIBUTION MADE TO ME AND CHANGE MY MIND AFTER I RECEIVE IT?

You have a 60 day rollover option. If your monthly payment is paid to you, you can still decide to roll it over to an IRA or another eligible employer plan that accepts rollovers. If you decide to roll over, you must make the rollover within 60 days of the date you receive the payment. The rollover will not be taxed until you take it out of the IRA or the employer plan.

You can roll over up to 100 percent of the eligible rollover distribution, including an amount equal to the 20 percent ($100) that was withheld. If you choose to roll over 100 percent, you must find other money within the 60-day period to contribute to the IRA or the eligible employer plan to replace the 20 percent that was withheld. If you roll over the $400 you received, however, you will be taxed on the 20 percent ($100) that was withheld.

For example: Your eligible rollover distribution is $500 and you choose to have it paid to you. You will receive $400 and $100 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $400, you decide to roll over the entire $500 to an IRA or eligible employer plan. To do this, you roll over the $400 you received from the retirement system and you add $100 from other sources (your savings, a loan, etc.). In this case, the entire $500 is not taxed until you take it out of the IRA or employer plan. When you file your income tax return, you report the $100 of tax withheld and may be eligible for a refund.

If, on the other hand, you roll over only $400, the $100 you did not roll over is taxed in the year it was withheld. When you file your income tax return you may get a refund of part of the $100 withheld, however, any refund is likely to be larger if you roll over the entire $500.

The term IRA used in this fact sheet includes traditional individual retirement accounts and individual retirement annuities. It does not include a Roth IRA, SIMPLE IRA, or a Coverdell Education Savings account (formerly called an Education IRA).

The Division of Pensions and Benefits cannot give tax advice. Additional information is available from a professional tax advisor and IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements. These publications are available from your local IRS office, by calling 1-800-TAX-FORMS, or over the Internet at www.irs.gov

 

 

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Last Updated: September 29, 2002