Florida Retirement System
Providing Solutions for State Employees
If you are a member of the Florida Retirement System (FRS), you have seen
a lot of changes to your retirement options over the past few years. At
Nelson Financial Planning, we regularly meet with state employees to help them make sense of their
options. These meetings generally focus on reviewing the pros and cons
of your retirement options to help you make an informed decision. In addition,
at retirement, we create personalized retirement income solutions to meet
your unique retirement expenses and tax liability. If you would like to
schedule a free consultation to review your FRS options with us, contact
our office at (407) 629-6477 today!
Planning your retirement income as a member of FRS is a very intricate
process. Depending on your age, your years of service, your FRS choices,
your deferred compensation account, the composition of your retirement
income will be different. We typically spend several hours with FRS retirees
properly planning their retirement income. We encourage you to contact
us to schedule your complementary, no obligation conversation about planning
your retirement income.
We want to warn you about three examples of FRS retirees receiving bad
advice that limited their retirement options.
First, do not rollover your deferred compensation account to an IRA if
you are under age 59½.
Once this money is placed in an IRA, you have to pay an extra 10% tax
penalty to use the money if you are under age 59½. If the funds
are left alone in the deferred compensation plan, you have completely
flexible access to the funds with no tax penalty.
Bottom line, if you are under age 59½, leave your deferred compensation alone.
Second, the guarantees and promises that come with these “new”
income approaches that use annuities are simply not as they are described.
These guaranteed income streams and returns are filled with caveats, fine
print and high costs. These promises don’t actually guarantee any
real return on your money as they only apply to internal insurance company
values. If FDIC guaranteed CDs are paying less than 1%, insurance companies
aren’t really paying you 5% or more.
Bottom line, if it sounds too good to be true, it is.
Third, if you are over age 55 and under age 59½ when you retire,
you need to leave the amount of money you will need to spend before age
59½ in the FRS Investment Plan.
The FRS Investment Plan provides you an exception to draw money out in
any amount or frequency without having to incur a 10% tax penalty for
early withdrawal if you retire in the year you turn age 55. This is a
very valuable option for those that qualify. If all the money is rolled
out of the FRS Investment Plan and into an IRA, you lose the flexibility
of this option.
Bottom line, if you are retiring in the year you turn age 55, you have
more flexibility by actually leaving some money behind in the FRS Investment Plan.
Properly planning your retirement income is of the utmost importance. These
are just some of the examples we have seen where if the retiree had followed
the advice given, they would have effectively eliminated their flexibility
in retirement or even worse been subject to an extra 10% tax penalty.
When you retire, if you are in the FRS Investment Plan and are eligible
to rollover your balance with no loss of flexibility, there are several
additional reasons why rolling over your FRS Investment Plan to an IRA
Participants in the FRS Investment Plan need to know the tax, investment,
and financial limitations that exist if they leave their money behind
in their Investment Plan account when they retire. The Florida Retirement
System has published a MyFRS Article entitled “Think Twice Before
Rolling Out of the Investment Plan.” This MyFRS Article suggests
that rolling your Investment Plan account to an IRA when you retire is
a costly mistake. However, this MyFRS Article ignores some very important
reasons why state employees are better off rolling their money out of
the Investment Plan into an IRA at retirement.
Expenses: The Whole Story.
Expenses are only one factor in comparing investment options. The MyFRS
Article compares the expenses of their proprietary FRS funds with other
fund companies and draws the conclusion that they are cheaper. However,
the MyFRS article is completely silent on the actual performance of these
When comparing investment options, the most important factor is not expenses
but what you earn after expenses.
Income Tax Limitations.
The MyFRS article does not mention the rigid tax planning limitations
of the FRS Investment Plan. The FRS Investment Plan requires a mandatory
tax withholding of 20% on any distribution made payable to a retiree irrespective
of what you actually owe. If you take $10,000, $2,000 will be sent to
the IRS and you will only get $8,000 to spend. When NIPS helps you retire,
we start with how much you want to spend and then determine not only your
tax liability but also when you should pay your taxes. Most of the time,
the tax liability amounts to 10-12% of distribution for a retiree. In
some cases, the proper timing of these tax payments may occur as late
as April 15 of the year after you retire. If your tax liability is only
$1,000, why withhold $2,000? The IRS does not pay interest on the difference
between what you had withheld and the amount you actually owe.
Why should you be required to withhold more taxes than what you actually
owe? This tax withholding is perhaps the most important reason to roll
your money out of the Investment Plan and into an IRA when you retire.
Service (or Lack Thereof).
Recently, NIPS called FRS to request a systematic withdrawal from the
FRS Investment Plan for a recent retiree. We were told that we needed
to call back the next day as they would not process that request right
then because the timing did not fall within their parameters. The next
day NIPS called back only to have to
wait on hold for NEARLY THREE HOURS!
The FRS Investment Plan rigidity and lack of service for FRS retirees
is quite troubling.
In the era of budget shortfalls and projected cuts, we expect this service
will only get worse.
As with any advice, there are always exceptions. In particular, if you
retire and are over age 55, you should keep an amount in the FRS Investment
Plan sufficient to cover your living expenses until 59 ½. Otherwise
you could face a 10% penalty on these withdrawals unless you chose to
use a 72(t) distribution from an IRA.