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:
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.
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