As a member of a North Carolina Retirement System, six percent of your pay has been withheld each month to build your pension account. If you leave your current employer and do not go to work for another participating employer, you have a couple options for the money you contributed each month. Below you’ll find some information that will help inform your decision. If you have any additional questions after reading this material, please email the Retirement Systems Division at firstname.lastname@example.org or call 877-627-3287.
What are my options?
When you leave your employment, you have two options: get a refund (withdraw your contributions) or keep your money in the retirement systems. There is a lot of information to consider before you make your choice, so please read this entire page to make sure you’re making an informed decision.
What are the benefits to keeping my contributions in the system?
If you have five or more years of retirement service credit, you may be eligible to apply for monthly retirement benefits as soon as your age qualifies you, provided you have not taken a refund. Please contact our office for assistance in determining your eligibility for monthly benefits.
All employees who leave their contributions in the system retain their first-hired date which is often used to determine whether or not you are eligible for certain benefits or employment rights. If you take a refund, you are forfeiting that first-hire date.
If you currently have less than five years of eligible retirement service credit, and you do not withdraw your contributions, you will maintain your retirement contributions and service. This means that you can come back to work for the same system in the future and use your past service to count toward your future retirement eligibility.
Are there any drawbacks to getting a refund?
Potentially. If you get a refund, you will forfeit:
- all rights to your retirement service credit and any pending or accrued benefits (you will no longer be eligible for a monthly retirement benefit)
- all benefits for any survivors or beneficiaries
- any state-provided health coverage, if applicable, provided by the Retirement Systems Division and/or the Disability Income Plan of North Carolina
- If you are specifically forfeiting extended short-term or long-term disability benefits, you will be asked to sign a waiver letter to confirm that you understand that you are forfeiting those benefits as well (if you are receiving short-term disability benefits, you are not eligible for a refund).
Additionally, if you return to service with a participating state or local government employer at a later date, and have received a refund of your previous service, it will cost significantly more to purchase this withdrawn service than the amount that was refunded (based on the lost interest and investment earnings to the pension fund).
If I choose to get a refund, how soon can I get the money?
A refund of your contributions (along with four percent interest compounded annually) is available to you 60 days after your effective date of resignation or termination. The 60-day waiting period is required by the General Statutes of North Carolina.
Members should fill out and submit Form 5 (Withdrawing Your Retirement Service Credit and Contributions) to the Retirement Systems Division.
After your Form 5 is processed, you will receive a paper check by mail unless you request that your contributions be rolled into another type of retirement account.
What happens if I receive a refund, then later become employed by a participating employer?
If you again become employed by an employer who participates in one of North Carolina's retirement systems, you may be interested in purchasing your previous service and contributions that you are withdrawing when you receive this refund. However, you will not be eligible to purchase withdrawn service until you return to service and contribute to a retirement system for another five years. If you become employed at a later date with a participating employer, and have received a refund of your previous service, it will cost significantly more to purchase this withdrawn service than the amount that was refunded (based on lost interest and investment earnings to the pension fund).
What happens after I submit my Form 5 to the Retirement Systems Division?
When we have received your Form 5, we will send you a letter which confirms that we are processing your refund.
It’s important to note that a refund of your contributions will be subject to taxes and will be reported for federal and North Carolina income tax purposes (see Tax Information section below). The check’s pay stub will include the amount reported. By January 31 of the next year, the Retirement Systems Division will mail you a 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, which will also show the following:
- the gross distribution,
- the taxable amount,
- the federal income tax withheld,
- the non-taxable amount, and
- the State of North Carolina income tax withheld.
What could delay my refund or tax documents?
- You change addresses and do not inform us
- Your last employer in the Retirement System does not report your final earnings
- You do not complete the Form 5 correctly.
- You do not provide additional documents which may be necessary if you wish to rollover your contributions.
You may contact the Retirement Systems Division to check the status of your refund by calling 877-627-3287.
How is the amount of my refund calculated?
The amount of your refund is the amount of contributions and interest you have in the Retirement System. Interest on your contributions, which is calculated at the rate of four percent compounded annually on your prior year ending balance, is included in your refund. Monthly contributions made by your employer on your behalf and by pension investment returns will not be refunded to you.
Besides getting a check, are there other options for how I can move my contributions out of the retirement system?
You may roll over your refund to an eligible individual retirement account (IRA) or other eligible employer plan. The NC 401(k) and NC 457 Plans and the NC 403(b) Program offered to public employees in North Carolina are eligible plans.
If you choose to proceed with a rollover, please advise your plan administrator that our plan is a 401(a) defined benefit plan under the Internal Revenue Code.
You must also provide the Retirement Systems Division with a letter from your financial institution that manages your eligible plan. This letter should accompany your Form 5. The purpose of this letter is to ensure the division that the institution will accept the rollover of your refund (financial institutions are not legally required to accept roll-overs of refunds). This letter must meet the following requirements:
- Be from the financial institution (on its letterhead)
- Give your name and your account number of the eligible IRA or employer plan
- Give the type of retirement plan, such as IRA or other qualified employer plan
- Clearly state that the institution will accept a rollover
- Clearly state how to make the check payable
- Have an authorized signature of an agent of the institution.
If you choose to have the accumulated contributions paid to you:
- The Retirement Systems Division is required to withhold 20 percent of the taxable portion and send it to the IRS as income tax withholding.
- Residents of North Carolina should note that income tax laws generally require the Retirement System to withhold 4% of the remaining taxable portion. However, per the Bailey Class Action Settlement, no North Carolina income tax will be withheld if the member maintained five or more years of creditable service in the Retirement System as of August 12, 1989. The Retirement System is unable to withhold income tax for other states. If you are not a resident of North Carolina, you have a choice to have North Carolina income taxes withheld.
- If you are under age 59 ½, you will have to pay the 10 percent additional income tax on early distributions on the taxable portion of accumulated contributions from the retirement system (including amounts withheld for income tax) that you do not roll over, unless you qualify for an exception. You should consult with your tax preparer for details about exceptions.
- You have 60 days to change your mind and have your contributions rolled over into a qualifying plan.
If you choose to rollover part or all of the accumulated contributions:
- You can choose a direct rollover of all or any portion of your payment that is eligible for rollover distribution (described above).
- You can also open a new eligible IRA to accept the direct rollover.
- If you take a job with an employer that offers an an eligible employer plan and you wish to rollover to that plan, you need to contact the plan administrator and ask whether it will accept your rollover.
If you choose a direct rollover to a traditional IRA or eligible employer retirement plan:
- Your payment will not be taxed in the current year and no income tax will be withheld.
- Your payment will be made directly payable to an eligible IRA or eligible employer plan that accepts your rollover.
- Your payment will be taxed later when you take it out of the eligible IRA or eligible employer plan. Depending on the type of plan, the later distribution may be subject to different tax treatment than it would be if you had received a taxable distribution from the Retirement System.
Special Rules Applicable for Rollovers to a Roth IRA
Eligible distributions paid from the retirement system may be rolled over to a Roth individual retirement account ("Roth IRA") either directly from the retirement system or within 60 days after you receive the distribution. Please note, an eligible distribution that you wish to roll over to a Roth IRA may only be rolled over directly from the retirement system to a Roth IRA.
We encourage members who are considering a refund to consult with their tax preparer for more information before making a decision.