State pension credit purchase question

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lws6772
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State pension credit purchase question

Post by lws6772 »

Turns out I'm eligible to buy back 4 years state service at a price just under $17K. The money can come from various eligible retirement plans, a trad ira or even cash. My question is, if I just write them a check will it create any negative tax consequences or a problem with the IRS? I'm not good at these things and trying not to complicate things. Thanks very much for any insight.
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Wiggums
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Re: State pension credit purchase question

Post by Wiggums »

You don’t want to take the money out of a retirement plan if it will be considered a pre-tax distribution. Especially if you’re under Age 59 1/2
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arcticpineapplecorp.
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Re: State pension credit purchase question

Post by arcticpineapplecorp. »

It will only create a tax situation now if you withdraw funds from IRA to make the payment. Otherwise if you take money from checking it creates no issues. It may increase taxes later because presumably your pension will be higher.
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DavidW
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Re: State pension credit purchase question

Post by DavidW »

I could be wrong but I understand that you can transfer funds directly from a 401k plan without having to "cash out" to pay for it. I believe CalPers offers that. You may want to confirm with the administrator
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lws6772
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Re: State pension credit purchase question

Post by lws6772 »

DavidW wrote: Mon May 16, 2022 4:09 pm I could be wrong but I understand that you can transfer funds directly from a 401k plan without having to "cash out" to pay for it. I believe CalPers offers that. You may want to confirm with the administrator
I previously had a 403b, but I transferred those funds(after a quad by-pass) into a trad ira about 18 years ago(dumb mistake). So I would be paying for the state service credit from that trad ira or from savings. It seems like a good idea to buy the credit, since it is a state pension. The payback break even for me is right at 10 years. I will be 65 soon, but my beneficiary is younger than me and she should be around for another 20 years or more(who knows the future right?).
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HMSVictory
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Re: State pension credit purchase question

Post by HMSVictory »

We have the option of taking the cost out of your final death benefit. If you have to write a check for it then do not use retirement accounts for the reasons specified above.
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Herekittykitty
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Re: State pension credit purchase question

Post by Herekittykitty »

Is it possible to roll over money from the traditional IRA directly into the system to purchase pension credits without creating a taxable event?''

(I haven't seen that addressed in this thread and I don't know the answer.)
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lws6772
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Re: State pension credit purchase question

Post by lws6772 »

Herekittykitty wrote: Mon May 16, 2022 4:57 pm Is it possible to roll over money from the traditional IRA directly into the system to purchase pension credits without creating a taxable event?''

(I haven't seen that addressed in this thread and I don't know the answer.)
That was exactly what I was wondering. Thank you so much for pointing that out.
delamer
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Re: State pension credit purchase question

Post by delamer »

According to this article, it’s possible to do a direct rollover from a qualified plan: https://retirementlc.com/purchasing-ser ... efit-plan/

But it doesn’t mention IRAs.
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lws6772
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Re: State pension credit purchase question

Post by lws6772 »

delamer wrote: Mon May 16, 2022 5:12 pm According to this article, it’s possible to do a direct rollover from a qualified plan: https://retirementlc.com/purchasing-ser ... efit-plan/

But it doesn’t mention IRAs.
Thanks for finding that.
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beernutz
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Re: State pension credit purchase question

Post by beernutz »

In 2020 I directly transferred $19k* from a TIAA traditional IRA to my state pension plan to pay for an additional year of service credit. The money went straight from TIAA to the state plan. Eventually. Before I moved it to the traditional IRA the money was in a TIAA traditional 403b.

It was not a taxable event. I got a 1099 but the taxable amount was $0.

It was however a taxing event as TIAA mucked up the process for weeks in a creative variety of ways requiring many phone calls, some more than an hour long, to correctly complete the transfer.

*I had a chance to buy the extra year for $2k back in 1995 but declined, figuring I'd never contribute to that pension system the 10 years required to vest. 25 years later though I changed my mind.
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calwatch
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Re: State pension credit purchase question

Post by calwatch »

DIrect rollover is probably easiest. If you pay cash from after tax funds you will have a portion of your pension which will be considered return of basis and non taxable.
carolc
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Re: State pension credit purchase question

Post by carolc »

My partner did that. She bought 4 years for about $80,000 which rolled over from a 457 plan. We retired 4 years earlier than planned. It was a wonderful decision!

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carolinaman
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Re: State pension credit purchase question

Post by carolinaman »

DavidW wrote: Mon May 16, 2022 4:09 pm I could be wrong but I understand that you can transfer funds directly from a 401k plan without having to "cash out" to pay for it. I believe CalPers offers that. You may want to confirm with the administrator
+1. Some pension systems allow transfer from IRA, but it may not be done by all pension systems. You should contact your pension system to find out.

I bought back 5 years in the NC pension system, but at the time, it did not allow payment transfers from non taxable accounts (it does now). I used after tax funds and now that I receive my pension, a portion of that is not taxed since I used taxable funds.
mamster
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Re: State pension credit purchase question

Post by mamster »

If you're considering taking the pension before full retirement age, I would check carefully whether credit you purchase can be used to qualify for early retirement. Often it can't.
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