Q: According to IRS categories, what type of plan is the Massachusetts Teachers’ Retirement System plan?
Your pension with the MTRS is considered a defined benefit plan that operates as a qualified employer plan under section 401(a) of the Internal Revenue Code. As a defined benefit plan, your retirement is based upon your years of creditable service, age at the time of your retirement and your final salary average. Your benefit is not based solely on your contributions and interest.
Q: What is the difference between after-tax contributions and pre-tax contributions?
For tax purposes, the MTRS identifies the balance in your annuity savings account (the total of your contributions and interest) according to the nontaxable (after-tax) and taxable (pre-tax) portions:
- Nontaxable (after-tax) portion: The nontaxable portion of your balance is equal to your contributions, if any, made prior to January 1, 1988, plus any payments you made to “buy back” previous creditable service. This is also known as your “after-tax” portion because these contributions were deducted from your paycheck after taxes had already been taken out of the entire amount of your paycheck. Because you have already paid taxes on this portion (as well as any payments you made to purchase creditable service), you will not have to pay taxes on this amount again.
- Taxable (pre-tax) portion: The taxable portion of your balance is equal to your contributions made on or after January 1, 1988, plus any interest you receive on your account. This includes any elective pre-tax payroll contributions that you may have paid toward your RetirementPlus accelerated cost. After January 1, 1988, all contributions were deducted from your paycheck before taxes were taken out. Since you have not yet paid taxes on this portion, it is taxable when you receive it in the form of a lump-sum payment or, if you roll over this portion to an eligible retirement plan, when you eventually receive these funds.
Q: Is my refund taxable by the Commonwealth of Massachusetts? By the federal government?
As described above, your refund includes taxable (pre-tax) and nontaxable (after-tax) amounts. At this time, these amounts are subject to tax as follows:
|Currently subject to tax by...|
|Contributions made before January 1988|
(also known as after-tax contributions)
|Contributions made after January 1988|
(also known as pre-tax contributions)
|Interest (all interest is pre-tax)||No||Yes|
For your reference, the pre-tax and after-tax amounts will be identified on the Form 1099-R that you will receive in January after the calendar year in which you receive your payment; this information will also be provided to the IRS. Again, we will give you more specific information if and when you should request a refund.
Q: How do I know how much the pre-tax and after-tax portions are?
These amounts are broken out in the statement of your annuity savings account that we send to you each year.
Q: Are there any tax penalties for early withdrawal of my funds?
In many cases if you are younger than 59–1/2 years of age, your refund is subject to a 10 percent income tax penalty. We do not withhold this tax penalty from your refund. For example: If you had $20,000 in your account, we would withhold 20% for federal tax withholding, so your actual refund would be $16,000. However, you would still be subject to a 10% early withdrawal penalty of $2,000 from the IRS (10% of $20,000).
For more information about this penalty, contact your local IRS office or a qualified tax advisor.
Q: What types of retirement plans may I roll over my refund to?
Although federal law allows the MTRS to roll over your funds to various plans, not all of these plans must accept rollovers from the MTRS. Accordingly, you must check with the administrator of the plan into which you want to roll over your payment as to whether that plan will accept a rollover from the MTRS. The plan you select must accept a rollover from a 401(a) plan, which is how the MTRS plan is categorized for IRS purposes.
|You may direct us to pay or roll over all or part of your after-tax and/or pre-tax funds, as indicated, to...||AFTER-tax funds||PRE-tax funds|
|Yes||Yes, but you will be taxed in the year in which the rollover is made.|
*A qualified defined contribution or defined benefit plan that will separately account for the pre-tax and after-tax funds may accept after-tax funds in a direct rollover.
**If you have the after-tax portion of your payment paid directly to you—instead of rolled over by us to one of the eligible plans—and you then want to roll over that portion within 60 days of receiving the payment from us, you can roll over that amount to a traditional or Roth IRA only.
You may avoid the 10 percent penalty (see above question) and 20 percent federal withholding tax either by:
- having the MTRS transfer the entire taxable portion of your refund into an eligible retirement plan or
- on your own and within 60 days after we have paid you your refund, rolling over the entire pre-tax portion of the refund into an IRA or qualified plan. (As a reminder, by law, we must withhold 20% of the taxable portion. If you take a full refund from us and then decide to roll over the pre-tax portion, you will need to use your own funds to make up the 20% that we withheld. Later, when you file your annual federal income taxes, you may be entitled to a refund from the IRS of the 20% amount that we withheld; you need to address this with the IRS at that time.) For example: Tim chose to receive a TOTAL REFUND of his account, and thus only received 80% of the taxable portion of his account. The remaining 20% of the taxable portion was sent to the IRS by the MTRS as income tax withholding. Upon receiving his refund check, Tim decided to roll over his account on his own. To do this, Tim must roll over the taxable portion to a traditional IRA (or to an 'eligible employer plan' that will accept his rollover) within 60 days of receiving his refund check from the MTRS. However, in order to roll over 100% of the taxable portion of his payment, Tim must find other money to replace the 20% that was withheld. If he rolls over only the 80% he received, he will be taxed on the 20% that was withheld and not rolled over. By rolling over the full amount of his taxable portion, Tim's rollover will not be taxed until he withdraws it from the IRA or employer plan. Please visit the IRS website for additional information.
Q: I have determined that I am eligible to withdraw my money from my annuity savings account. However, I do not want to withdraw my money at this time. Can I just leave the funds in my account with the MTRS?
Yes, you may leave the money in your MTRS annuity savings account. The MTRS will keep your funds on account and continue to send you annual statements which show your balance and any activity, such as addition of interest. Although your statement will reflect additional interest each year, you will be eligible to receive interest on your account for only two years following the date of your termination of service if you apply for a refund at a later date. If, however, you do not take a refund but later return to a position which requires membership in a Massachusetts contributory retirement system, all interest reported on your statements will be credited. Taxes are not assessed on this money until your annuity savings account funds are paid to you in a refund or retirement allowance, or paid to someone else as a result of your death.