Let’s talk taxes…

As if winter isn’t dreadful enough for those of us warm-weather lovers, at this time of year another certain unsavory topic is likely to preoccupy our thoughts—taxes.  You know, that necessary evil that everyone wishes wasn’t so painful?  Since it’s on all our minds though, we thought we’d talk about a few of the common tax issues that come up regarding your LAGERS benefits.

Generally speaking, your LAGERS benefits are taxable.  The Internal Revenue Code doesn’t require you to include in your taxable income the amount your employer contributes to LAGERS on your behalf, but you will pay taxes on the distributions you later receive from the plan.  If you were not required to contribute to LAGERSthen your benefit will be 100% taxable.  We will withhold both federal and Missouri state income taxes on monthly benefits at your request.  The following are some of the other common issues or questions regarding your LAGERS benefits:

• Employee contributions:   If you are required to contribute 4% of your salary to LAGERS, those contributions should be included in your taxable income, subject to all payroll taxes, including federal and state income taxes. Your W-2 should just include the amount contributed in box 1, “Wages, tips and other compensation.” The contributions should not be reported in any other box on the form unless your employer wants to provide them as information only in box 14. The only evidence on your W-2 that you participate in LAGERS should be a check mark in box 13 “Retirement Plan,” regardless of whether you have to make contributions or not. Please note that these contributions are very different from any tax-deferred contributions you may make to a 457(b) plan for example. Those deferrals are not included in your taxable income until the time you make withdrawals. Many tax-preparers are not even aware of the distinction, but it is an important one.

So how do we make sure you aren’t taxed again when you receive distributions from LAGERS?  If you terminate employment and receive a refund or lump sum payment from LAGERS, the full amount of contributions you made to LAGERS is reported on a Form 1099R as non-taxable.  If you retire and receive a monthly benefit, any contributions you made are allocated over your expected life span as non-taxable amounts.  Interest on contributions is always taxable.

• Taxes on one-time distributions: When you receive a one-time payment (refund, lump sum, partial lump sum option in conjunction with a monthly retirement benefit), unless you do a qualified rollover to a tax-deferred plan, LAGERS is required by the Internal Revenue Code to withhold 20% of the taxable amount of the payment and send to the IRS on your behalf. Whether this is enough or too much tax will depend on your total taxable income at the time you file your annual income tax return. You may owe less or get monies refunded to you, but the withholding requirement is always 20%.

In addition, unless you meet one of the statutory exceptions (you are disabled, you are receiving the benefit as a survivor, you are over age 50 if public safety or over age 55 if a general employee) you will likely be subject to a 10% penalty assessed by the IRS when you file your annual tax return.  The distribution code LAGERS includes on your Form 1099R will alert the IRS as to the applicability of the penalty.

• Missouri income taxes: Very importantly for any of you who move out of the state of Missouri and are having us withhold state income taxes from your monthly retirement benefit, please tell us to stop! We try to watch for this when we notice address changes, but until you direct us to stop withholding we will continue to do so, and the withholdings are only for the state of Missouri. It’s to your benefit to not have monies sent to the state when you will no longer be filing Missouri income tax returns.

The other big thing to know about Missouri income taxes is the existence of the Public Pension Exemption.  When you receive a public pension in Missouri, a portion of it is excludable from your taxable income.  The exclusion amount depends on your adjusted gross income, but is limited to $36,976 per spouse for 2015.  Please see the Missouri Department of Revenue’s website at http://dor.mo.gov/personal/ptc/pension.php.

• Disability retirements: This is a confusing area tax-wise for many, including tax preparers. A big reason for this is that disability benefits may be taxable or non-taxable depending on how they are calculated. LAGERS disability benefits are taxable, and the Form 1099R provided to you each year reflects this. If you were required to contribute to LAGERS, a non-taxable allocation pertaining to those contributions will be reflected on your 1099R beginning the year you reach normal retirement age.

• Purchases of service: Besides regular employee contributions discussed earlier, some of you may have purchased service such as military time. How your benefits are later taxed depends on the source of funds you used to make the purchase. If you transferred funds to LAGERS from another qualified retirement plan that were not previously taxed, then your benefits will be entirely taxable when they are paid to you. On the contrary, if you used personal funds for the purchase that had been previously taxed, then that portion of your benefits will be non-taxable.

• Form 1099R: You will receive this form when you receive a one-time distribution or after year-end when you receive monthly benefits from LAGERS. The forms are required by law to be in the mail by January 31^st, and are also available to you through myLAGERS for retirees. The LAGERS website offers an excellent tool for explaining the different boxes on the form—take a look at http://www.molagers.org/taxes—1099-rs.html.

No doubt this will come as no surprise to you, but the Internal Revenue Code can be very confusing.  Though we are not qualified to give individual tax advice, we encourage you to contact our office any time with questions pertaining to your specific situation and we will assist in any way we can!

Pam Hopkins, Compliance Officer/Internal Auditor

What to Expect During Your First Year in Retirement

Your first year in retirement is a little like starting a new job, only without all the work.  But still, it involves establishing a routine, figuring out when your money will come in, building new relationships, and feeling excited about the future.  Starting a new job means dealing with a lot of unknowns, and beginning a new chapter in life as big as retirement is no different.  Here is what you can expect from LAGERS during your first year.

 

Your benefit is paid at the beginning of each month.

You will receive your retirement benefit from LAGERS on the first of each month.  A benefit received on February 1^st is your payment for the month of February.  Your payment will arrive on the first banking day of each month if you have chosen to have your benefit automatically deposited into your bank account.  If you have chosen to receive a paper check, LAGERS mails those out on the last mailing day of the previous month.

No matter if you choose direct deposit or a paper check, we cannot pay you sooner than the first of the month.  For example, the first banking day in 2016 is January 4^th, so that is when your benefit will be added to your bank account.

Also, you will not receive a monthly payment stub from LAGERS if you have signed up for direct deposit.  We will mail you a stub, however, any time the net amount of your benefit changes because of cost of living adjustments, tax withholding changes, or for any other reason.

 

Your Partial Lump Sum (PLUS) is paid no sooner than 90 days after the date of your first LAGERS payment.

Many retirees select the Partial Lump Sum (PLUS) option in order to get some money up-front in exchange for a reduced monthly amount.  The soonest LAGERS will pay out the PLUS is three months after the date you first received a payment from us.  For example, if your first benefit payment is February 1st, the soonest LAGERS would pay the PLUS could be May 1st.  You may choose to extend the PLUS payment out as far as five months.  Extending the payment allows some people to push the PLUS into the next tax year.

If you choose the PLUS and decide not to directly roll it into another retirement account, LAGERS withholds 20% of the taxable portion of the PLUS and forwards it onto the IRS.  LAGERS is required to withhold this amount in all circumstances.  However, if your tax liability ends up being less than what was withheld, you can apply for a refund at the end of the year.  The entire amount of your PLUS will be sent to one of your eligible retirement accounts if you choose a direct rollover.

So why do we wait three months to pay you the PLUS?  This is to ensure we have all information from your employer about your final wages and service so we can double check that your benefit amount is correct.  This is also why you may see your monthly amount change slightly three months after you retire.

 

You are eligible for your first cost of living adjustment on October 1^st of your second calendar year of retirement.

LAGERS Board of Trustees may grant an annual adjustment of retiree benefits in order to keep pace with inflation.  If approved, these cost of living adjustments, or COLAs, are paid to retirees on October 1^st each year.  In order to be eligible for your first COLA, you must be retired for 12 full months including an October 1^st.  For example, any person that retires in 2016 won’t also receive a COLA in 2016.  You would, however, receive a COLA in 2017 if your retirement is effective January 2016 – October 2016.  If your retirement will be effective in November or December 2016, you will be eligible for your first COLA on October 1, 2018.  But, you would also receive a little more than everyone else so that we can ensure your benefit is worth the same as it was when you retired.  The point of COLAs is not to increase your benefit, but rather to make sure you can buy the same goods and services today as you could in the past.

 

The first year of retirement can be a wonderful adjustment into the next stage of your life.  Knowing what to expect will help this be a smooth transition so that you can focus on all of the great aspects of retirement!

 

Jeff Kempker
Manager of Member Services

The Top 5 Questions on LAGERS Retirees’ Minds

 

LAGERS retirees are an inquisitive and engaged group.  They ask wonderful questions to better understand their LAGERS benefits.  I have compiled a short list here of some of the most frequent questions we get from our retired crowd.  Let me know if we need to add some more to this list!

Can I retire and then come back to work for another employer?

Absolutely!  I once talked to a member who said his dream was to retire and then become a greeter at Wal-Mart because he assumed that was truly a job with zero stress.  While I’m not qualified to speak about the stress levels of Wally World employees, I can tell you that this would be allowed under LAGERS’ rules.  A person who retires from a LAGERS employer can go back to work either part-time or full-time for any employer that is not in LAGERS and the monthly benefit will not be affected.  A LAGERS retiree can also go back to work part-time for a LAGERS employer, even one from which she is receiving a benefit, and the amount of the benefit will not be affected.  Be careful here, however, as LAGERS defines part-time differently than a simple 40-hour work week.  If you plan to re-employ after you retire with another LAGERS employer, check with our office first about how many hours you are allowed to work how this may impact your monthly retirement income.

What about working full time for a different LAGERS employer than one you retired from?  This is allowed too, but you must have at least one-month break between your last day of work or your retirement effective date (whichever is later) and your re-employment date.  If you don’t have that one month break, we would have to suspend the monthly benefit you are currently receiving.  So, take a month off, you deserve it!  If you do this, you would again be covered under LAGERS at your new employer and eligible for a second benefit after 12 months of employment; all the while, receiving your full, uninterrupted benefit from your first employer.

All of this can get a bit tricky, so if you are planning to go back to work for a LAGERS participating employer, either part-time or full-time, please contact us so we can walk you through it!

Who guarantees that my LAGERS benefit is secure?

People want certainty these days and a constant question we get from active members and retirees alike is, “how do I know my benefit will continue being paid, in full, for my lifetime?”  The good news is that receiving a retirement benefit from LAGERS is about as certain as one can get.  One reason for this is because your monthly payment is not affected by benefit changes your employer may make after you retire, nor is it affected by the economy or market swings.  Another reason is because your retirement benefit is pre-paid.  This means that at the time you retire, LAGERS sets aside, in a separate fund designated only for retirees, enough money to pay you for the rest of your life.  This protected trust is solely for the benefit of LAGERS retirees and beneficiaries.   And, that fund, as of June 30, 2015 is slightly above 100% funded, meaning we have all the money we need on hand today to pay the protected lifetime benefits for our 18,000+ current retirees.

When will I receive my tax forms from LAGERS? 

LAGERS mails the 1099-R form (which is basically a W-2 for retired people) annually to each of our retirees.  The IRS requires the 1099-Rs be mailed no later than January 31^st each year so retirees can expect this form in their mailbox in early February.  You may be able to get a copy about one week sooner by logging onto the myLAGERS web portal and printing it from there.

Can I waive the 20% tax withholding on the Partial Lump Sum?

If a retiree chooses the Partial Lump Sum (PLUS) and decides not to directly roll it into another retirement account, LAGERS withholds 20% of the PLUS and forwards it onto the IRS.  LAGERS is required to withhold this amount, in all circumstances, even if the retiree is disabled.  However, if your tax liability ends up being less than what was withheld, you can apply for a refund at the end of the year.

I need a pension award (income verification) letter, how do I get that?

A pension award letter is basically proof that you are receiving monthly income from a retirement plan.  This may also be called an income verification letter which may be needed if you are applying for a loan or some other type of credit.  There are a couple ways you can get this letter.  One is online through the myLAGERS web portal.  After logging into your account, click on the “Income Verification” link on the menu and then select “Download Income Verification.”  Another way is to simply call our office.  We will need to verify your identity over the phone, and then we will send the letter to you in the mail.

This has been a small sample of the questions we frequently receive from retirees.  Please comment on this blog if you believe we have missed some.  We always love to write about the topics you care about most!

 

Jeff Kempker
Manager of Member Services