ROLLOVER ALTERNATIVES FOR LOSAP

In a post from May 20, 2019, we discussed why a LOSAP benefit cannot be rolled over to a qualified plan. You can read that article HERE.

Additionally, since a LOSAP benefit is not earned income (for Firefly clients, the income is reported on a 1099-MISC in Box 3), it cannot be deposited into an IRA. 

So what alternatives exist? If you are receiving a LOSAP benefit and are still working and receiving W-2 income, or you are married and your spouse is still working and receiving W-2 income, here are some options:

• If  your employer offers a 401(k) (or similar deferred compensation plan if you work for a government, non-profit, or school), you can temporarily increase your contributions to the retirement plan to offset the LOSAP distribution. For example, if you receive a $10,000 LOSAP distribution, simply defer an extra $10,000 into your 401(k). This solution only works if you are not already maximizing your contributions to your 401(k), which for 2022 is $27,000 for anyone over age 50. 
  
• If you are married, your spouse still works, and you are already in the habit of co-mingling your combined income into joint accounts, you might obtain additional flexibility from a 401(k) (or similar) offered by your spouse’s employer. You may have additional contributions you can now make (up to $27,000 per person for a total of $54,000 assuming your spouse is over age 50 also).  Or, if you are not working but your spouse is, a similar approach to the first bullet point could be followed but done by your spouse. You then use the LOSAP benefit to offset the contributions to the 401(k).
  
• You could also utilize a traditional IRA, though the contribution limits are much less and there are income restrictions. The maximum tax-deductible contribution to an IRA for 2022 is $6,000, provided you do not exceed the income restrictions. Similar to the previous two bullet points, you would contribute a tax-deductible amount into your IRA and then use the LOSAP distribution to supplement your income for that year. But again, this only works if you (or your spouse) are still working and has W-2 income to deposit into an IRA. Talk to a financial advisor for more details. 

In all three cases, you are simply deferring federal income tax to a later point in life. Unless the federal tax code is changed, you will ultimately pay federal income tax of some amount (the tax rate could be different) on this income when you receive a distribution from your 401(k) or IRA.

State tax is a little more tricky, in particular for those that live in NY State and plan on remaining here. Under current NY State tax law, a non-lump sum payment from a LOSAP to an individual over age 59 1/2 can be subtracted from your NY State taxable income in the year of distribution. Therefore, anyone who qualifies for this exemption will not pay NY State income tax on their LOSAP distribution. However, if you took one of the approaches above, once that income is deposited into the 401(k) or IRA the distribution you receive later will no longer be a LOSAP distribution. As such, you essentially lose the special tax exemption for a LOSAP distribution here in New York. There are other exemptions and tax-strategies that can be considered, so it is very important to review these possible strategies with your own tax and financial advisor. 

Firefly Admin Inc. does not provide income tax advice or legal advice. This article is general information, is not meant to be an authoritative or exhausted analysis of all possibilities, and is not legal or tax advice. You are strongly encouraged to seek the help of a qualified tax and legal professional before receiving a LOSAP distribution or implementing any strategies theorized in this article.