Monthly Archives: January 2016

Let’s talk taxes…

photo-1448908828366-ae00562d5fdeAs if winter isn’t dreadful enough for those of us warm-weather lovers, at this time of year another certain unsavory topic is likely to preoccupy our thoughts—taxes.  You know, that necessary evil that everyone wishes wasn’t so painful?  Since it’s on all our minds though, we thought we’d talk about a few of the common tax issues that come up regarding your LAGERS benefits.

Generally speaking, your LAGERS benefits are taxable.  The Internal Revenue Code doesn’t require you to include in your taxable income the amount your employer contributes to LAGERS on your behalf, but you will pay taxes on the distributions you later receive from the plan.  If you were not required to contribute to LAGERSthen your benefit will be 100% taxable.  We will withhold both federal and Missouri state income taxes on monthly benefits at your request.  The following are some of the other common issues or questions regarding your LAGERS benefits:

  • Employee contributions:   If you are required to contribute 4% of your salary to LAGERS, those contributions should be included in your taxable income, subject to all payroll taxes, including federal and state income taxes. Your W-2 should just include the amount contributed in box 1, “Wages, tips and other compensation.” The contributions should not be reported in any other box on the form unless your employer wants to provide them as information only in box 14. The only evidence on your W-2 that you participate in LAGERS should be a check mark in box 13 “Retirement Plan,” regardless of whether you have to make contributions or not. Please note that these contributions are very different from any tax-deferred contributions you may make to a 457(b) plan for example. Those deferrals are not included in your taxable income until the time you make withdrawals. Many tax-preparers are not even aware of the distinction, but it is an important one.

So how do we make sure you aren’t taxed again when you receive distributions from LAGERS?  If you terminate employment and receive a refund or lump sum payment from LAGERS, the full amount of contributions you made to LAGERS is reported on a Form 1099R as non-taxable.  If you retire and receive a monthly benefit, any contributions you made are allocated over your expected life span as non-taxable amounts.  Interest on contributions is always taxable.

  • Taxes on one-time distributions: When you receive a one-time payment (refund, lump sum, partial lump sum option in conjunction with a monthly retirement benefit), unless you do a qualified rollover to a tax-deferred plan, LAGERS is required by the Internal Revenue Code to withhold 20% of the taxable amount of the payment and send to the IRS on your behalf. Whether this is enough or too much tax will depend on your total taxable income at the time you file your annual income tax return. You may owe less or get monies refunded to you, but the withholding requirement is always 20%.

In addition, unless you meet one of the statutory exceptions (you are disabled, you are receiving the benefit as a survivor, you are over age 50 if public safety or over age 55 if a general employee) you will likely be subject to a 10% penalty assessed by the IRS when you file your annual tax return.  The distribution code LAGERS includes on your Form 1099R will alert the IRS as to the applicability of the penalty.

  • Missouri income taxes: Very importantly for any of you who move out of the state of Missouri and are having us withhold state income taxes from your monthly retirement benefit, please tell us to stop! We try to watch for this when we notice address changes, but until you direct us to stop withholding we will continue to do so, and the withholdings are only for the state of Missouri. It’s to your benefit to not have monies sent to the state when you will no longer be filing Missouri income tax returns.

The other big thing to know about Missouri income taxes is the existence of the Public Pension Exemption.  When you receive a public pension in Missouri, a portion of it is excludable from your taxable income.  The exclusion amount depends on your adjusted gross income, but is limited to $36,976 per spouse for 2015.  Please see the Missouri Department of Revenue’s website at http://dor.mo.gov/personal/ptc/pension.php.

  • Disability retirements: This is a confusing area tax-wise for many, including tax preparers. A big reason for this is that disability benefits may be taxable or non-taxable depending on how they are calculated. LAGERS disability benefits are taxable, and the Form 1099R provided to you each year reflects this. If you were required to contribute to LAGERS, a non-taxable allocation pertaining to those contributions will be reflected on your 1099R beginning the year you reach normal retirement age.
  • Purchases of service: Besides regular employee contributions discussed earlier, some of you may have purchased service such as military time. How your benefits are later taxed depends on the source of funds you used to make the purchase. If you transferred funds to LAGERS from another qualified retirement plan that were not previously taxed, then your benefits will be entirely taxable when they are paid to you. On the contrary, if you used personal funds for the purchase that had been previously taxed, then that portion of your benefits will be non-taxable.
  • Form 1099R: You will receive this form when you receive a one-time distribution or after year-end when you receive monthly benefits from LAGERS. The forms are required by law to be in the mail by January 31st, and are also available to you through myLAGERS for retirees. The LAGERS website offers an excellent tool for explaining the different boxes on the form—take a look at http://www.molagers.org/taxes—1099-rs.html.

No doubt this will come as no surprise to you, but the Internal Revenue Code can be very confusing.  Though we are not qualified to give individual tax advice, we encourage you to contact our office any time with questions pertaining to your specific situation and we will assist in any way we can!

Pam Hopkins, Compliance Officer/Internal Auditor

Pam Hopkins, Compliance Officer/Internal Auditor

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Grandpa’s Advice: “Find an Employer with a Good Retirement.”

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When I was in college, my grandpa would tell me, “make sure you work somewhere with a good retirement.”  Those words didn’t mean much to me then.  I just wanted a job (preferably in my area of study) that paid well.

I was hired to work at a public pension plan right out of college at the age of 23.  It was a job, so I was happy.  My grandpa asked me, “does this place have a good retirement?”  Yes, grandpa it does.  “Good.”  he said, “That’s worth a lot.”

Twelve years later I am still working with the same public pension plan and my grandpa’s words ring as true as ever.  He worked for the state highway department for about 20 years, a job he got after driving a bus for the city.  Grandpa was able to retire in his 60s, living off his modest state pension check, social security, and savings, the traditional three-legged stool of retirement security.  A man with only an eighth grade education, he is grateful for his monthly pension income.  It has enabled him to transition from a middle class worker to a middle class retiree and allowed him to enjoy the same standard of living he had while working.  Now in his late 80s, grandpa still lives in his home with my grandma and is financially independent.

Now days it’s getting harder and harder to find a place to work that offers a “good retirement.”  About half of workers in the private sector do not even have access to an employer-sponsored retirement plan and if they do, it is likely an unreliable 401(k)-type plan that depends on market returns to build a nest egg.  I often think about how my grandpa’s retirement would have been different if he would have had to decide how much to save, when to save, where to invest, when to re-allocate his assets, and when and how much to withdraw so he didn’t outlive his savings.  Not to mention trying to endure the ups and downs of the markets throughout his working life.

Everyone who works hard and plays by the rules should be able to retire with dignity.  Defined benefit pensions are still the most efficient way to attract quality workers, retain those workers during their most productive years and then allow them to retire at a reasonable age.

Despite all of the good defined benefit pensions can accomplish, they are under constant attack.  Wall Street millionaires want to put an end to pensions and switch everyone to a 401(k)-type plan.  Why?  Not because it will increase Americans’ retirement security, but so they can collect more money in fees by managing individual accounts.

Today, not only do my grandpa’s words mean a lot to me because of my personal financial future, but also the financial futures of 60,000 current and former local government workers that have a defined benefit pension with my employer, the Missouri Local Government Employees Retirement System (LAGERS).  We at LAGERS believe strongly in the defined benefit model and the positive effect pensions have on workers, workplaces and the economy.  We will continue to work to protect defined benefit pensions in Missouri.  How about you?

 

Jeff Kempker Manager of Member Services

Jeff Kempker
Manager of Member Services

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Realistic Expectations for Investment Returns Are Vital for Pension Funding

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A discount rate is the interest rate pension plans use to calculate the current value of future retirement benefits.  This tells you how much money is needed today to be able to pay future benefits, which in turn is one factor in determining the contribution rates required from employers and employees.

The assumed rate of return is the return that a pension fund plans to receive on its investments and is determined by using a set of assumptions to project future investment returns.  The discount rate and assumed rate of return are one in the same which helps to ensure steady contribution rates as well as making sure there is enough investment income to cover future liabilities.  The investment income matters, as investment earnings account for a majority of pension funding.  A shortfall in long-term expected investment earnings must be made up by higher contributions or a reduction in benefits.

The most important thing to understand about a discount rate and assumed rate of return is that ultimately, the pension fund’s actual return on investment matters much more than the discount rate and the assumed rate of return.

Here is an example. Let’s say a pension fund assumes a low discount rate of 4%.  Initially, the contributions required from employers and employees would be high because the fund expects only a 4% return on investments.  But over time, the fund’s investment returns exceed a 4% return, and so, the contributions required will decrease because more money than expected is being poured into the fund from investment return.

Now let’s assume a pension fund has a high discount rate of 9%.  Initial contributions would be low because the plan is expecting a high return on investments.  Over time, however, if the pension fund’s investments do not return 9%, contributions would have to increase in order to pay for the benefits.

The trick with choosing a discount rate is to pick a figure that is realistic so that contributions may remain steady for decades, helping to ensure the taxpayers of today are charged as appropriately as the taxpayers of tomorrow. In other words, the end result should create generational fairness.

LAGERS uses a conservative discount rate of 7.25%.  This is based on an asset liability study that incorporates capital market assumptions and liability projections for the future.  As of 2015, LAGERS’ 20 year return is 8.70% and its return since inception is 8.92%.  These assumptions are formed every five years to ensure the appropriate figures are being used to maintain a financially stable pension fund.  LAGERS is very comfortable with its assumptions and the contribution rates charged to employers and members.

 

 

Megan Loehner, Senior Investment Officer

Megan Loehner Senior Investment Officer

 

 

 

 

 

 

Jeff Kempker Manager of Member Services

Jeff Kempker
Manager of Member Services

 

 

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A New Year’s Resolution You Should Consider

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Do you already have a new year’s resolution? This year, I have a couple. The first is very similar to many Americans – I am going to try to live a healthier lifestyle. However, the other resolution is not quite as conventional for most Americans. I want to become more knowledgeable about planning for retirement. As a LAGERS member you have several opportunities to become more educated about your retirement benefits through LAGERS.

Pre-Retirement Seminars: First and foremost, if you are nearing retirement age, a LAGERS Pre-Retirement Seminar is a must. These seminars are designed to help a LAGERS member make educated decisions regarding their LAGERS retirement benefit. They will also include information about how the benefit is calculated, regular and early retirement provisions, in-depth discussions about payment options, taxes, cost of living adjustments and much more! Since there is so much information to absorb at one of these seminars, I would suggest you attend more than one before you retire. Click Here to view the schedule.

Live & Recorded Webinars: There are three live webinars hosted every month. These webinars are interactive and don’t require you to leave the comfort of your desk. The various topics include pre-retirement planning, separating from LAGERS covered employment, LAGERS overview, and much more. Don’t work at a desk? No problem. Each webinar topic is recorded and placed on our website for future view. Click here to view the recorded and upcoming webinars!

In-Person Employee Meetings: Each LAGERS employer has the opportunity to set up in-person group employee meetings on-site. These must be set up by the employer’s administration with LAGERS Member Services staff. Typically, there are a few different types of meetings set up by an employer such as a general overview of the LAGERS system and the benefits the employer is providing, a mini pre-retirement seminar specifically highlighting the benefits of that employer, or an explanation of a change in benefits. If you or your employer may be interested in an in-person employee meeting, send an email to info@molagers.org

myLAGERS Portal: The myLAGERS portal is absolutely one of the best retirement planning tools that you have at your disposal. The capabilities of the system were designed to give you more information about your personal LAGERS account and how it all works. One of the most powerful tools that the myLAGERS portal has is the ‘Benefit Calculator.’ This benefit calculator is essentially the same software that is used by internal LAGERS staff when a benefit estimate is requested by phone. It allows you to produce a benefit projection to an estimated retirement date based on the salary and service already on record with LAGERS. Unlike requesting a benefit estimate from the LAGERS office, the benefit calculator allows you to assume pay raises, increase service for purchases, and estimate the net monthly amount after taxes. The benefit calculator is just one of the wonderful tools available to you on the myLAGERS portal. Click Here to access the myLAGERS portal (click on the myLAGERS logo at the bottom of the page). If you have never used it before, click the “Enroll Now” button.

So, will you join me with my unconventional resolution and further educate yourself about retirement? If you do, your LAGERS system has plenty of opportunities for you to further your education about your retirement system.

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Jeff Pabst, CRC Communication Specialist

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