ANSWER: First, let’s discuss the final pension loan and Variable Supplement drop program since the tax laws are the same for both. (Then we’ll address the PBA Annuity Fund and New York City Deferred Compensation program separately since different rules apply.)

The final pension loan — described in detail in the winter 2007 edition of The PBA Magazine — is derived from your contributions plus the interest earned on them over your NYPD career. This distribution (loan) may include funds that were already taxed and therefore are tax- free when you receive them at retirement. The Pension Fund counselor will provide exact figures as to what part of your distribution is subject to taxes when you file to retire. The taxable amount is subject to federal taxes only but is also subject to a 10% tax penalty if you retire before the age of 50 — a recent change in the IRS code reduced it from 55.

If you retire for service with over 20 years you will also receive a distribution from the Variable Supplement Fund drop program. This will be a sum equal to all variable supplement payments you would have received from your 20th anniversary or January 1, 2002, whichever is later, through the effective date of your retirement.

This amount, as with your final loan, is subject to federal taxes only and the additional 10% penalty if you retire before 50. You can postpone paying the federal taxes on both the final loan and variable supplement drop distribution and avoid paying the 10% penalty altogether by rolling them into a qualified IRA or 401k at retirement. But if you do that, you won’t be able to withdraw them without penalty until age 59 1/2.

Once retired, you can also withdraw the funds from your PBA annuity account. These funds are subject to federal taxes only plus the additional 10% penalty if you retire before the age of 55 (not 50, as with the final loan and variable supplement). These can also be rolled over into a qualified IRA or 401k.

Although the final pension loan, variable supplement drop and PBA annuity fund proceeds are not subject to New York State taxes, they may (or may not) be subject to state taxes if you relocate to another state.

The final funds available to you upon retirement, if you are a member, are those in your New York City Deferred Compensation account. These funds are subject to regular taxes when withdrawn from the fund without any penalty due to age. If you live in New York when the funds are withdrawn, they will be subject to New York taxes. If you move to another state before withdrawing the funds, however, they will no longer be subject to New York taxes but may be subject to taxes where you live. These funds may also be rolled into an IRA or 401k, but — again — if you do that, you won’t be able to withdraw them without penalty until age 59 1/2. Therefore, rolling them over may not be such a good idea.

The above information is provided for your information and guidance. We strongly recommend that you consult with a tax professional at retirement.