There may be some potential income tax issues as a result of a transfer from the NC 401(k) or NC 457 accounts to the Teachers’ and State Employees’ Retirement System (TSERS) and/or Local Governmental Employees’ Retirement System (LGERS) that you may wish to discuss with a tax advisor:
- This transfer will NOT change the NC income tax status of the transferred funds as defined under the previous litigation generally referred to as the Bailey decision. For example, if you are Bailey-vested in the TSERS or LGERS, but not in the NC 401(k) or NC 457 accounts, this transfer will not result in the transferred funds being exempt from NC state income taxes. Likewise, if you are Bailey-vested in the NC 401(k), but not in the TSERS or LGERS, this transfer will not cause you to lose your NC state income tax exemption on the transferred funds. This treatment was specified in the law enabling the transfers (SL2010-124).
- Federal and state income taxes, as applicable, become payable when you begin to receive the benefits. Depending on when you were planning to otherwise withdraw funds from your NC 401(k), NC 457, NC 403(b) account(s) or other supplemental accounts, choosing this transfer option may accelerate or delay the federal and state taxation of the transferred funds. Meaning, if you transfer the funds to TSERS or LGERS earlier than when you would otherwise have withdrawn them from your NC 401(k), NC 457, or NC 403(b) account(s), your tax liability on the benefits will also begin earlier. On the other hand, if you delay the transfer to a later date, or choose to receive benefits from your NC 401(k), NC 457, or NC 403(b) or other supplemental accounts at a later date, the taxation of the future benefits will begin at that time.
- The payments resulting from the transfer may qualify as regular periodic distributions under IRS distribution rules - see 401(k) Resource Guide General Distribution Rules for more information.
Note: It is recommended that you consult with a tax advisor before making any changes to your NC 401(k), NC 457, NC 403(b), or other supplemental accounts.