Written by Stephen Ostrofsky, CFP®
Even today, many deputy sheriffs and firefighters that I meet with are still unaware of changes in tax laws that provide significant tax relief from IRS penalties levied against pre-591/2 withdrawals made from certain employer sponsored retirement plans. The Trade Priorities and Accountability Act of 2015 (H.R. Bill 2146), also known as the “Defending Public Safety Employees’ Retirement Act”, became effective December 31, 2015. This tax law expanded an exemption from early withdrawal tax penalties from certain employer sponsored retirement plans.
This exemption is provided to qualified “public safety employees” including federal law enforcement officers, customs and border protection officers, federal firefighters, air traffic controllers and State, County and Municipality employees that provide “police protection, firefighting and emergency medical services”, that have reached age 50. Public safety employees, often referred to as “first responders” are occupations which traditionally require earlier retirement ages due to the high-risk nature of the services they provide to the communities they protect. Prior to these changes, the old tax laws did not address the need for public safety employees to access retirement accounts earlier in life than most Americans.
What does this new tax legislation mean to public safety employees such as Deputy Sheriffs and Fire Rescue Professionals? Without an understanding of these tax law changes, retirees may unknowingly distribute too large of a portion of their FRS Investment Plan balances to an IRA Rollover Account, thus limiting flexibility for generating retirement income. They can now access their entire FRS Investment Plan balances, after age 50, without being subject to a 10% early withdrawal IRS penalty. Prior to the new tax law, only FRS Defined Benefit Plans and 457 Deferred Comp Plans avoided 10% IRS penalties for early retirement withdrawals. Historically, FRS Investment Plan and DROP account balances were subject to early withdrawal penalties, unless retirees followed a withdrawal regime that complied with IRC section 72(t), which requires substantially equal withdrawals based on life expectancy, that must last for 5 years or to age 591/2, whichever is longer.
Tax Law Details for FRS Investment Plan Participants
The HR Bill 2146 amends the Internal Revenue Code and expands exemptions for Deputy Sheriffs and Fire Rescue Professionals, who have reached age 50, from a 10% penalty tax on early distributions from retirement plans, to include FRS Investment Plan and DROP accounts that have not been transferred to IRA Rollover Accounts. For retired FRS Investment Plan participants, who have begun to make “substantially equal periodic withdrawals from the FRS Investment Plan under IRC 72(t) can now increase the amounts withdrawn without any IRS early withdrawal penalties. In fact, the new rule is retroactive, so a 10% IRS penalty won’t be triggered.
True North Financial Advice
True North Financial Advisors, located in Boca Raton, Florida provides personalized financial planning and investment advisory services through personalized attention. To help with a personalized financial planning experience we provide a web-based platform through eMoney Advisor® which is easy for clients to upload and organize their financial information on their own personalized financial website — largely without any assistance. To learn more go to our video library.
This article should not be used for tax advice. In any specific case, the parties involved should seek the guidance and advice of their own tax counsel.
