The Importance of Isolating Rolled Over Pension Money
At retirement, some FDNY & NYPD Tier 2 members elect to rollover pension money (excess/overage, VSF DROP, etc.) into an IRA. At Brave Eagle Wealth Management we isolate the client’s pension rollover money in its own IRA, no other retirement plan money (NYC Deferred Compensation Plan 457, 401k, etc.) is rolled into the pension money IRA. By isolating the pension rollover money, the calculation to determine the portion of the distribution that is non-taxable NYS/NYC and the portion that is taxable NYS/NYC is straightforward. Also, it provides the taxpayer with the most flexibility in limiting NYS/NYC taxes upon distribution/conversion. Further, it is easier to explain to the NYS Department of Taxation and Finance upon audit when the pension money IRA only consists of pension money.
Recently, a retired FDNY member called the Brave Eagle Wealth Management office seeking information about isolating pension money in an IRA. The retired member was having great difficulty convincing a large nationally known investment management company to open two separate IRAs; one for the pension money rollover and the other for his NYC Deferred Comp 457 plan rollover. The large investment management company refused to open the two separate IRAs because they felt there was no purpose to it even after the retired member explained the favorable NYS/NYC tax attributes of the pension money rollover. Ultimately, the large investment management company deposited all of the retiree’s retirement money into one IRA.
The following is an example highlighting the importance of isolating the pension rollover money. At retirement, John (NYS resident) rolled over $250,000 of FDNY pension excess money into his Brave Eagle Wealth Management IRA #1 and rolled over $250,000 of NYC 457 into his Brave Eagle Wealth Management IRA #2. One year after retirement John decides to do a $100,000 Roth conversion; both IRAs have a balance of $275,000. Brave Eagle Wealth Management recommended that John use IRA #1 for the $100,000 Roth conversion. The result for John is $90,909 of the $100,000 Roth conversion is non-taxable NYS and only $9,091 is taxable NYS.
The following is an example of a retiree, Mary (NYS resident), who rolls over $250,000 of FDNY pension excess money and $250,000 of NYC 457 into one IRA. One year after retirement Mary decides to do a $100,000 Roth conversion; the IRA has a balance of $550,000. The result for Mary is $45,455 of the $100,000 Roth conversion is non-taxable NYS and $54,545 is taxable NYS.
The first example clearly illustrates the importance of isolating the pension rollover money to achieve a more favorable NYS tax result.