To All Delegates and Members

March 1, 2002

The PBA has successfully lobbied for a bill increasing the amount you can borrow against your contributions to your pension account from 75 percent to 90 percent. Gov. Pataki signed the bill Feb. 8. Used wisely, the increase should enhance your financial flexibility while you are still on the job as well as when you retire.

Here are some tips on how and when to take advantage of the borrowing option:

Members with at least three years of service may take out these loans, which are automatically repaid with interest through payroll deductions. Be sure to read and understand the instructions on the front of the loan form. Pay careful attention to the rules governing when the loan becomes a taxable distribution. A taxable loan is subject to only federal taxes, but if the member is under 59 1/2 years old, there is also a 10 percent penalty.

Make sure the loan makes financial sense by comparing the interest rate with those of other available creditors. The pension loan costs 8 1/4 percent (4 percent paid by the member into the fund, plus another 4 1/4 percent not being paid into your account by the city). Therefore, it would make no sense to borrow at this rate to buy a car being offered at 2 percent financing. In a case like that, you would obviously pay the auto finance company 2 percent and continue earning 8 1/4 percent from the city. But if you are faced, for example, with a 12 percent interest rate on the outside, it makes sense to borrow from your pension at 8 1/4 percent.

The bottom line: When other credit costs less than 8 1/4 percent, DO NOT BORROW FROM YOUR PENSION. When other credit costs more than 8 1/4 percent, APPLY FOR A TAX-EXEMPT PENSION LOAN.

When retirement time rolls around, we always recommend that you take a maximum pension loan and roll it over into an IRA to avoid immediate taxation. Now that the maximum has been increased to 90 percent, that advice makes even more sense.

In summation, borrowing from your pension account can either save or cost you. Be sure to use this newly-legislated advantage wisely.

Fraternally,

Patrick J. Lynch
President