Home  >  Financial Articles and Q&A  >  I am in a defined benefit plan with my employer...

I am in a defined benefit plan with my employer (government). Are voluntary contributions tax deductible?

In my job we can purchase service which will increase the retirement benefit. I want to make a cash purchase ($10,000) to buy 3 years in the system and want to know if that purchase is tax deductible.

Oct 23, 2012 by jim from Columbia, SC in  |  Flag
3 Answers  |  6 Followers
Follow Question
5 votes
Herbert N Glass Level 18

Generally voluntary participant contributions are not deductible if made to a governmental defined-benefit pension plan, or any other defined-benefit pension plan. The only plans that a voluntary contribution made by a participant would be deductible are those made to a 401(k) plan, 403B plan, or a 457 plan. With respect to your nondeductible voluntary contributions made to the defined-benefit plan; those contributions are added up and consider to be your after-tax basis in your account. This means that at the time you take distributions from such plan, some of the distributions may be nontaxable. You will have to discuss that specific matter with either your tax professional or someone in the benefits department of the governmental organization that you are contemplating making such voluntary contributions.

2 Comments   |  Flag   |  Oct 23, 2012 from Franklin, MI
Aaron

Please disregard if this is a duplicate request - can you share the IRS code # that states that voluntary contributions are not deductible, or is this an interpretation of the code. We have almost the same issue as described where a city government worker purchased 'air time' in the amount of $20K to retire early. Thank you

Flag |  Sep 27, 2014 near Albuquerque, NM
Jeffrey

You have it backwards. There has to be a specific authorization for it to be deductible. If there is no authority, then it's nondeductible.

Flag |  Dec 01, 2017

1|600 characters needed characters left
4 votes

Jim,

Here is info from the State of Texas ERS system. This may differ in your state.

"If you are an active employee, you may purchase Additional Service Credit (ASC) if you have at least 10 years of actual ERS service credit (not counting military service). ASC can advance your earliest retirement eligibility date and/or increase the value of your standard annuity upon retirement. You must purchase all service for which you may be eligible, such as withdrawn ERS service, military service, etc., before you will be allowed to purchase ASC. Usually, ASC must be purchased in increments of one year; however, if you can use ASC to establish eligibility for an immediate retirement, you may purchase the necessary months rather than the full one-year increment. ASC is designed to be revenue neutral to the retirement system and as a result could be expensive to purchase. The cost of this service will change with an increase in your age, your salary, or your years of employment with the State. The maximum amount of ASC you can purchase decreased from 60 months (five years) to 36 months (three years) on January 1, 2006. Following are examples of how this new limit works: • If you purchased three years of ASC by December 31, 2005, you cannot buy more. • If you purchased four or five years of ASC by December 31, 2005, you can keep all of it, but you cannot buy more. • If you purchased two years of ASC by December 31, 2005, you can purchase one more year after January 1, 2006. You may purchase ASC or other service credit through rollovers from your Texa$aver 401(k) or 457 Plans, rollovers from other qualified plans or IRAs, or personal check or money order. You may purchase ASC or other service credit through rollovers from your Texa$aver 401(k) or 457 Plans, rollovers from other qualified plans or IRAs, or personal check or money order."

I would take the last paragraph to mean that you will not be able to deduct after-tax contributions toward buying back your time in the system. However, you could use IRA money if approved by the state. This could mean that you might be able to use pre-tax dollars to buy back the time if you already have the money in a pretax IRA account. I suggest consulting a tax professional for specifics in your area and in your particular pension plan.

Take care, Todd

Comment   |  Flag   |  Oct 23, 2012 from Austin, TX

1|600 characters needed characters left
3 votes

Jim From my research and experience I do not think your purchase of service credits are tax deductible in the year paid. This is not like a contribution to an IRA or Retirement account. It may benefit you when you start withdrawing from the system as it should show you paid in x amount as employee contribution but without knowlwedge of particular plan I really can't say but I think you may have tasx basis in the $10,000 you pay in. Good luck. Mark Schreiber CPA

Comment   |  Flag   |  Oct 23, 2012 from St Louis, MO

1|600 characters needed characters left