10% "additional tax" penalty for taking pension before Age 55?

[TomTX]

So, as an employee of Texas, I am covered under a pension plan: http://www.ers.state.tx.us/

I have already sent them an inquiry (and a followup) for this question. All I get back is generic "we see you will qualify to start taking retirement at XX date, which will be XX amount based on your current salary."

I have dug out from their documentation myself that it is a qualified 401(a) plan

I will be 53 (almost 54) when I am first eligible to take the pension (at about 54% of my current salary, not inflation indexed).

I am currently fully vested with >10 years of service, when I am eligible I will have >20 years of service.

Age + years of service will be >= 80 years.

Do I need to worry about the 10% "Additional tax" if I start taking the pension before Age 55 as I would with a 401k?

If the answer is "yes" - I have a followup.

[Murse]

In my humble opinion the answer is no you do not need to worry about 10% if the 90% already makes you FI. However if you need more (after including your nest egg) then it needs to be discussed further.

[TomTX]

The difference between $30k and $27k per year from the pension is meaningful to me. That's weeks of tropical vacation every year, over a month if we're being frugal about it.

It's equivalent to having $75k extra in a Roth at a 4% SWR.

[MDM]

So, as an employee of Texas, I am covered under a pension plan: http://www.ers.state.tx.us/

The one that says "Your retirement program is a defined benefit plan."?

If so, that is different from a 401k "defined contribution" plan.

IANAL but have never heard of the 10% "Additional tax" applying to defined benefit plans, so the answer should be "no".

[TomTX]

So, as an employee of Texas, I am covered under a pension plan: http://www.ers.state.tx.us/

The one that says "Your retirement program is a defined benefit plan."?

If so, that is different from a 401k "defined contribution" plan.

IANAL but have never heard of the 10% "Additional tax" applying to defined benefit plans, so the answer should be "no".

Thanks. There is scuttlebutt at work about additional tax, but the people talking about it seem to have trouble separating 401k from the pension.

[Longwaytogo]

We are in MD but DW will also be eligible for her Pension around 52/53 and we plan on taking it then.

I had never heard of any tax for taking it early

[TomTX]

We are in MD but DW will also be eligible for her Pension around 52/53 and we plan on taking it then.

I had never heard of any tax for taking it early

Thanks.

My backup plan is to go for the Age 50 designation - after reading the IRS published definition, I seem to meet it. While it is not my normal duties, I have "provided firefighting services" while employed by the State, while on State time, in a State vehicle, using training I received from the State.

Twice I have put out grass fires in the highway right-of-way with the vehicle fire extinguisher.

[arebelspy]

Do I need to worry about the 10% "Additional tax" if I start taking the pension before Age 55 as I would with a 401k?

I don't think so?

I've never heard of that, but following, as it's relevant to me, too.

[ender]

Some pensions penalize you in their formula for taking it early and give better benefits if you delay them, is that what is inspiring this possibility?

[TomTX]

Some pensions penalize you in their formula for taking it early and give better benefits if you delay them, is that what is inspiring this possibility?

Nothing published in their formula that I can find for age affecting payout. It's a pretty simple 2.3% of (final average 36 month) salary per year of service.

[robartsd]

Some pensions penalize you in their formula for taking it early and give better benefits if you delay them, is that what is inspiring this possibility?

Nothing published in their formula that I can find for age affecting payout. It's a pretty simple 2.3% of (final average 36 month) salary per year of service.

The percentage per year of service changes slightly with age for most plans, if it does not for Texas state employees, that's great for someone who gets a state job young and chooses to retire early. In my system the benefit factor ranges from 1.092% at age 50 to 2.418% at age 63 or older.

[TomTX]

Some pensions penalize you in their formula for taking it early and give better benefits if you delay them, is that what is inspiring this possibility?

Nothing published in their formula that I can find for age affecting payout. It's a pretty simple 2.3% of (final average 36 month) salary per year of service.

The percentage per year of service changes slightly with age for most plans, if it does not for Texas state employees, that's great for someone who gets a state job young and chooses to retire early. In my system the benefit factor ranges from 1.092% at age 50 to 2.418% at age 63 or older.

It does not vary by age for Texas state employees in ERS. It's also not inflation adjusted - what you get is what you will continue to get.

I have not investigated the other plans (Teachers have a separate plan, municipal employees have one, Law Enforcement has one, etc.)

However, when you can take it gets complicated.

As a pre-2009 employee, I need one of the following for the pension + medical:

Age + Years of Service = 80, and Years of Service >=10
Age = 65, Years of Service >=10.

For pension only, no medical

Age + Years of Service = 80, and Years of Service >=5
Age = 60, Years of Service >=5.

I already have > 10 years of service, plus I purchased 3 years of service time (the max.)

For those who started on or after September 1, 2009 it gets more restrictive.

[arebelspy]

Mine penalizes 4%/yr for taking it before a certain age (65, unless you have at least 10 years, then 60, unless you have at least 30 years, then any age).  It is not in the calculation formula, but a separate thing.  You sure yours has nothing like this?

[TomTX]

Mine penalizes 4%/yr for taking it before a certain age (65, unless you have at least 10 years, then 60, unless you have at least 30 years, then any age).  It is not in the calculation formula, but a separate thing.  You sure yours has nothing like this?

I'll continue poking at them. Eventually they will have an in-person retirement seminar nearby.

I've got 10 years before I could draw anyway, even with continued work.

[Need2Save]

I do not have direct experience with government pensions, but I believe if you seperated from service and took a partial or full lump sum payout prior to age 55 it would be subject to the 10% penalty, but if you plan to take the monthly benefit annuity-style only, then it would not be because it would be considered equal periodic payments.

If found this in the Texas ERS Retirement Planning brochure:
Partial lump-sum option (PLSO)
You may choose to receive a one-time payment equal to one to 36 months of your standard payment as a lump sum at retirement. If you choose this option, ERS pays this in addition to your monthly retirement payment. By selecting a PLSO, you permanently lower your monthly payments. Your age at retirement and the number of months you choose for the PLSO determine how much the payment is reduced.

The following members cannot receive PLSOs:
• Disability retirees (see page 6 for more information on disability retirement)
• Proportionate Retirement Program (PRP) retirees (except for those age 60 and over with at least five years of service credit; see page 17 for more information on proportionate retirement)

You can take your PLSO as a direct cash payment. You would pay 20% in taxes and may have to pay an additional 10% penalty for early withdrawal if you retire from state employment younger than 55. If you provide your direct deposit information early enough, we may be able to deposit the PLSO directly into your account within five days of your first monthly retirement payment.

You can also roll your PLSO payment into a Texa$aver 401(k) or 457 Plan account. ERS coordinates the rollover and sends it directly to Great West. You cannot use the PLSO rollover to pay off an existing Texa$aver loan.

If you do attend the upcoming workshop and they clarify this for you, please report back.   I would really like to know if that is true or not.

[TomTX]

Ah, that could be where it came from.

One guy who insists on this is short-sighted enough to have taken the PLSO. He did buy a Porche after "retiring" - stayed retired 1-2 years, then back to working and eventually back to working in my building.

[tai86]

So, as an employee of Texas, I am covered under a pension plan: http://www.ers.state.tx.us/

The one that says "Your retirement program is a defined benefit plan."?

If so, that is different from a 401k "defined contribution" plan.

IANAL but have never heard of the 10% "Additional tax" applying to defined benefit plans, so the answer should be "no".

Hey.

I'm a special education teacher in NJ and I know that there are penalties if you decide to retire early. Do you have other investments? If no, then why would you want to jeopardize living on $30k a year? I have multi-family apartments that generate substantial income for me, month after month. Have you every thought about getting in real estate? You only need $100k invested for your first 12 door building. 

[TomTX]

So, as an employee of Texas, I am covered under a pension plan: http://www.ers.state.tx.us/

The one that says "Your retirement program is a defined benefit plan."?

If so, that is different from a 401k "defined contribution" plan.

IANAL but have never heard of the 10% "Additional tax" applying to defined benefit plans, so the answer should be "no".

Hey.

I'm a special education teacher in NJ and I know that there are penalties if you decide to retire early. Do you have other investments? If no, then why would you want to jeopardize living on $30k a year? I have multi-family apartments that generate substantial income for me, month after month. Have you every thought about getting in real estate? You only need $100k invested for your first 12 door building.

As far as I can tell, there is no penalty if I start drawing when my age + years of service = 80, and I cannot draw until then anyway.

I think this thread has put the phantom 10% penalty to rest with 2 plausible explanations: Partial Lump Sum Option or 401k  if taken before 55.

I do have other investments, inside IRAs (mix of traditional and Roth) and the state 457 plan.

Real Estate would make sense, but I find it intimidating. I really should go to one of the RE investor meetups.

[arebelspy]

As far as I can tell, there is no penalty if I start drawing when my age + years of service = 80, and I cannot draw until then anyway.

Ah, yes, if that's your scenario, there's no option to draw it early, so no way to be penalized for doing so.

Likely the people telling you of the penalty were thinking of the lump sum.

Sounds like you're good to go.  :)