Buying Years of Service as Asset Protection

[Mountain_Mike]

Greetings REs and Wannabees,

In the CALSTRS (teacher's retirement) system, I recently found out you can retire as young as age 50 IF you have 30 or more years of service.

I also found that STRS will let you purchase additional years of service. This really has me thinking: my wife will have around 27 years in at age 50, so buying 3 years sounds like a quick ticket to RE. I figure the cost of buying the 3 years to be around $45,000....then, it's a penion for life, 3 years early! Question: does anyone know if purchasing years of service from either a 403b or a 457 is a taxable "event?"

I also got to thinking, after reading the thread on "asset protection" that putting money into retirement service credit seems to be a rock-solid way to get a bit of asset protection. While retirement funds could be raided to pay medical bills or judgements, I don't think that lump sum judgements can be taken from pension plans. If one's home and accounts were somehow lost due to a catestrophic event, at least the monthly income stream would keep coming in...is this correct?

 

[MasterBlaster]

Yes Qualified assets (401k,403b etc) and pensions are protected from creditors and most judgements (except divorce and some fraud settlements).

The best example of that is O.J. Simpson. His NFL pension that he now lives on could not be sued away.

IRA assets may also offer some legal protection but their status is less settled in the courts.

Can't help you on buying service years in your pension and whether or not it is taxable.

 

[yakers]

My wife works under CSTRS and we bought back 1 2/2 years of time from work she had done long ago and withdrawn her contribution. It was pretty expensive to buy the time back and she doesn't need it for her retirement next year at 58 with (counting the 1 1/2 years) 22 years of teaching. As far as I can calculate it was a wash with putting the money into a Roth or other investment. Actually its a lot more like buying an annuity. It does lock in an income stream for her and was good psychologically to acknowledge the time she worked. But her whole pension will be in the $20K-$22k range and she will not get SS. Working to 60 would increase the pension particularly as there is a penalty for retiring before that age. And she doesn't get the high year. But the resulting sanity of leaving her teaching situation is *priceless*.
Buying more time would be the same issues financially, like getting an annuity. I don't really recommend it. Getting diverse investments would probably pay better and be secure but not as simple as buying more time under the pension.

 

[youbet]

  Question: does anyone know if purchasing years of service from either a 403b or a 457 is a taxable "event?"

You can't buy years of service from a 403b.  There are "catch-up" provisions which can be used in later years to partially make up for underfunding your 403b in earlier years.  Sounds like you may be confusing your defined benefit pension plan with your 403b.

 

[kenepp1]

When my wife retired from the Texas school system 6 years ago we purchased 5 years from another state's teaching. It only cost us $15K total and was well worth it in pension increase. I specifically asked if the $15K was tax deductible and was told it was not.

 

[Mountain_Mike]

Thanks, everyone for yoru responses. I did a little more research on the STRS website, and in their booklet on purchasing service credit, it says, "You may roll over funds from a qualified plan such as a 401K, 403b, or 457 for all or a portion of the purchase amount. So, I take "roll" to mean a transfer from a 403b to the retirement fund, not subject to income tax. Of course, if I consider this more seriously, I will do more research.

As to the question of asset protection, what do you think? Is it more advantageous to have the guaranteed "safe" income stream, or is it better to have the freedom do do what I want with the funds? My rough estimate indicates about an 11 year "payoff" where the amount spent to purchase service credit would be recouped.

 

[Ginger]

We just did this last month! Found out we could buy back one year of service credit. We decided to just write the check and mail off and not transfer funds from our retirement accounts. Today is my DH's official retirement day!!

 

[Mountain_Mike]

Good for you Ginger. I have discovered that the amount gained by buying additional service equates to an approximate 8% guaranteed investment. Not bad, and definitely worth looking into!

 

[bosco]

Question: does anyone know if purchasing years of service from either a 403b or a 457 is a taxable "event?"

You can't buy years of service from a 403b. There are "catch-up" provisions which can be used in later years to partially make up for underfunding your 403b in earlier years. Sounds like you may be confusing your defined benefit pension plan with your 403b.

I purchased time in my State of Alaska pension in a pretax transfer from a 403b plan. If I am not mistaken (and I could be) there is a relatively recent law which allows this to occur pre-tax. I would check with the employer to see if they have a mechanism for doing this like the State of Alaska does.