TRICKS OF THE TRADE
PSERS: Purchasing Out-of-State Service Credits
Prepared by Nicholas DeVito, CFP®
As you may already know, you must have a full year of service in PSERS before you are eligible to purchase out-of-state credits. You are permitted to purchase one out-of-state credit for each year of PSERS service, up to a maximum of 12 years. Credits can be purchased on a year-by-year basis as you accumulate PSERS service time. That being said, there are a few rules that must be followed in order to be eligible to purchase these credits:
Rules for Purchasing Out-of-State Service Credits:
- You must not be actively collecting, or have previously collected, benefits from the state pension system for which you are purchasing credits.
- You must withdraw all of your contributions and interest from the other state’s pension program.
Note: When withdrawing, it is critical that you do not receive any employer contributions, as that will immediately disqualify you from being able to purchase the out-of-state credits. - You will need to complete the Purchase Out-of-State Service (PSRS-278) form to apply for the credits. Your former employer will also be required to complete a portion of this form.
The cost of purchasing the credits is based on a formula, which is determined by your PSERS membership class. Class T-D and T-C use one formula, while Classes T-E, T-F, T-G, and T-H follow a different calculation. The detailed formulas are outlined in the Guidelines for OOS Purchase.
Payment Options for Out-of-State Service Credits:
- Lump Sum Payment – Due within 90 days of purchasing the credits
- Payroll Deductions – Withheld from your paycheck, subject to your current employer’s policies
- IRA / 401(k) / 403(b) Rollover – You may roll over funds from a qualified retirement plan to pay for the credits
- Debt to Pension Benefit – A debt will be placed on your benefit, and your monthly pension will be reduced accordingly once you begin collecting. Keep in mind, this is a reduction on an increased benefit due to the additional credits.
A few months back, I called PSERS and spoke with a representative who mentioned that, based solely on your PSERS benefit, purchasing out-of-state credits will never leave you worse off, even with the debt reduction applied to your pension. However, this does not factor in your broader financial picture. When evaluating whether purchasing the credits makes sense, you should compare the value of your VRS benefit to the additional PSERS benefit you would receive as a result of the credit purchase.
If you, or anyone you know, is considering retirement and collecting their pension from PSERS or any other entity, please feel free to contact us. We will take the time to teach you how PSERS retirement pension works, and work with you to assess the most effective payout method based upon your needs.
Helpful supporting links:
GUIDELINES FOR COMPLETING OUT OF STATE SERVICE
OUT OF STATE PURCHASE FACT SHEET
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies may be suitable for you, consult the appropriate qualified professional prior to making a decision. Menninger & Associates Financial Planning and LPL Financial do not offer tax advice or services. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of a conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
