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 if they are planning to retire. Our retirement advice is generally focused 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 accounts to meet your unique retirement expenses and tax liability. If you would like to schedule a free consultation to review your FRS and estate planning options with us, contact our office at (407) 307-3061 today to speak with one of our financial advisors!

Planning your retirement savings 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 benefits 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.

As one of the best financial planning firms, 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. In addition, their income guarantee offers of 8% include the return of your actual investment in this calculation. Despite what annuity advertisements assert, that should never be considered a part of your profit. Your real rate of return (i.e., the actual profit on the investment you made initially) is typically only 2 to 3 percent. 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 or older. 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 makes sense.

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 FRS funds. 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 we help 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, we 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 we 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.

Exceptions. 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.