If you participated in the Public Employees Retirement System and left your job, as an inactive participant you may have the option -- or be required -- to take out any contributions you made. You can have the funds sent to you or roll them over into another employer's retirement plan if your new employer will accept them. You can also roll funds over into an IRA. Since most of your contributions were probably made on a pre-tax basis, if you roll them into a Roth IRA, which is funded with after-tax money, you will have to pay income tax on the entire untaxed amount in the year you receive it. However, you won't be subject to the 10 percent additional penalty on early withdrawals.
Contact the financial institution with which you want to open a Roth IRA and explain that you want to fund the account using your refunded PERS retirement plan contributions. Request that the necessary forms be mailed to you.
Decide whether you want to make a direct plan-to-plan transfer or do an indirect rollover. With a direct transfer you will not see the money. The entire amount will transfer directly to your Roth and you will pay the taxes when you file your income tax return. With an indirect rollover you will receive the check and your former employer will have to withhold 20 percent for income taxes in case you don't complete the rollover in time.
Contact the human resources department or plan administrator for your former employer and ask for the paperwork to withdraw your contributions. Depending on your employer, the process may be fairly simple or more complicated. You may be required to wait 30 days from your termination of employment to receive your refund. Specify whether you want to do a direct or indirect transfer and explain that you are converting your refund to a Roth IRA.
Deposit the entire amount of your refunded contributions into your Roth IRA within 60 days of receipt if you chose an indirect rollover. Weekends and holidays count. If you do not complete the transfer in time and you have not reached your earliest retirement age under the plan -- which for PERS can vary from age 50 to 59 1/2 depending on your type of employment -- you will have to pay a 10 percent penalty.
Watch for a Form 1099-R to arrive in the mail from your plan administrator. This will show the taxable and nontaxable amounts (any after-tax contributions you made to PERS). Complete IRS Form 8606 and report any amounts on line 36 of the form on line 15b of Form 1040 or on line 11b of Form 1040A. You cannot use Form 1040EZ in a year during which you receive retirement plan distributions.
- It is important to decide in advance how you will pay the taxes on your Roth conversion. If you pay the taxes directly from your refund, any amount you do not put into your Roth will be subject to an additional 10 percent penalty if you have not reached your retirement age. Consider, instead, having your new employer withhold more from your pay or taking the taxes out of another investment that is not growing tax-free.
- Only distributions attributable to your own contributions or lump-sum withdrawals are eligible for rollover from a PERS defined benefit plan to an IRA.
Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).