Purchase of Air Time - What would you do?

[riverrat]

I'm considering purchasing 5 years of service credit from CAlPERS for a cost of $ 87,035. It would increase my monthly income by $740 for the rest of my life and would by part of my pension with 100% survivor bene and 2% cola.

Here's the kicker: this from CALPERS attachment letter

"...however, there is a slight risk that even with certifying to the "corresponding service," the IRS may find that in-service transfers from 457 plans are not permissible to purchase ARSC. In this event, CALPERS may be required to take corrective measures, such as reversing the trdansferred amounts and related earnings back to the transferor plan. Alternatively, the IRS could treat the amount transferred from these accounts as taxable income on the date it was transferred. In addition, the transfers made to the CALPERS defined benefit plan might be treated as after-tax contributions and subject to the $41,000 annual additions limit imposed by section 415(c) of the IRS Code."

I have until January 11, 2005 to get the paperwork done. I've elected to receive the check FOB me on January 1, 2005 in the worse case scenario and the 87k becomes taxable (lower income in 2005 than 2004 - retired July 2004 with vacation/sick payout)

The $740 extra/mo would make life more comfortable and even though we could budget and still get by just fine without it and not touch our $710K pretax money we would probably tap 16 to 20 k in 2005 just to have more fun.

Of course the company that holds the 457 money is strongly advising against the purchase.

What would you do?

 

[Hyperborea]

I'm considering purchasing 5 years of service credit from CAlPERS for a cost of $ 87,035. It would increase my monthly income by $740 for the rest of my life and would by part of my pension with 100% survivor bene and 2% cola.

That's equivalent to a 10% withdrawal rate from the $87K (740x12/87K) and with a COLA. You're going to have a very hard time to beat that.

Here's the kicker: this from CALPERS attachment letter
<snip>

I have until January 11, 2005 to get the paperwork done. I've elected to receive the check FOB me on January 1, 2005 in the worse case scenario and the 87k becomes taxable (lower income in 2005 than 2004 - retired July 2004 with vacation/sick payout)  

So, the worst case appears to be that it would become taxable income. That seems to be a case that you are considering anyways. Is there any way that you can get a more definitive answer on whether this will likely happen? Is there any history of this happening?

Of course the company that holds the 457 money is strongly advising against the purchase.

Of course they are. They don't want to lose money under management.

What would you do?  

Well, if it were me and it's not, I'd try to find out more about what may cause the IRS actions in the note you quoted. If it doesn't seem too likely then I'd roll the dice and take a chance at the extra $740/month.

 

[JohnP]

Hey - the company that holds your 457 forgets that it is your money, not their's!

It is a lot of money to buy those corresponding service credit but would the 457 company match it? I doubt it.

I think that you are on the right track. I concur with Hyperborea on getting the best info on the IRS position and rolling the dice and taking a chance on the extra 740 per month.

JohnP

 

[73ss454]

Who and What is CAIPERS?
Can someone please explain how this works.
Would it work with a State pension?
Thanks
JOE

 

[Brat]

California public employees pension system is known as CALPERS, I think there is a typo from CalPERS.  It covers a lot of folks so you may see others on the board who have experiance with them.

 

[Bob_Smith]

"...however, there is a slight risk...

I'd be concerned about this risk and would want to know more about the likelihood, the specific consequences, etc. This is one of those times I'd pay an accountant to spend some time discussing any tax consequences. I'd also post the question here:

http://fairmark.com/messages.htm

and here:

http://www.irahelp.com/cgi-bin/forum/index.cgi/

But it sounds like a very good deal, and I'd definitely go with it if I was reasonably certain I wouldn't get burned.

 

[ESRBob]

RiverRat:

How can I get one!!!

Just kidding, I am supposing this is part of your retirement benefits/pension as a California State employee?  Is this being given to lure you to retire?

However you slice it (barring the fine print that Bob Smith's well-advised accountant visit will vet for you),  a 10.2% probably taxfree, Cola-adjusted immediate annuity (for someone doing ER?) sounds like something I'd do in a heartbeat.

In fact, try to see if you put even more $ into it than the 88K!

As they say in Australia, 'Good on Ya, Mate!'

ESRBob

PS: Oh, and tell the 457 financial advisor company to find you a better deal and you'll leave your $ with them! Tell them you've got about 1000 friends who'd come buy that deal, too, any time they want to start marketing it.