You may be eligible to borrow money against your retirement contributions, but the loan may have tax implications. A NYSLRS loan is exempt from New York State and local income taxes, but it would be subject to federal taxes if the loan amount exceeds certain limits. That means you would need to include it on your federal income tax return for the year the loan is issued.(We’ll send you a 1099-R to file with your taxes.)
If you already have one or more outstanding NYSLRS loans, all or part of your new loan could be taxable. Also, if you already have a loan from a deferred compensation (457) or a tax-sheltered annuity (403-b) plan from your current employer, the total of all of your loan balances will be used in calculating your tax threshold.
The tax impact can be significant, and may even push you into a higher tax bracket. And, if you’re younger than 59½, the Internal Revenue Service (IRS) may charge a 10 percent penalty on top of your federal income taxes. Even if a substantial portion of your loan goes to the IRS, you’ll still have to repay the entire amount, plus interest, to NYSLRS. Moreover, if you do not pay off your loan before you retire, your pension will be permanently reduced.
You can have NYSLRS withhold 10 percent of the taxable amount from your loan check, but in most cases that will not cover the total amount you will owe the IRS.
Multiple Loans vs. Refinanced Loans
You may be able to avoid taxes, or at least lower them, by the way you structure your loan. If you have one or more NYSLRS loans and are considering another loan, you’ll have two options. You can take it as a separate loan (known as a multiple loan) or you can refinance your existing loan(s) to include the new loan amount.
The multiple loan option minimizes the potential tax impact. The minimum payment amount is higher for a multiple loan, but the minimum payment amount goes down as your loans are paid off. (The separate loan payments will be combined into a single payroll deduction.) The refinanced loan balance is spread over an additional five-year period. This reduces the minimum payment, but the taxable amount of a refinanced loan will always be greater than the taxable amount of a multiple loan.
Retirement Online, our self-service tool that gives you secure access to your account information, is the most convenient way to apply for a loan. Retirement Online will also let you know how much you can borrow, your repayment options and whether your loan is taxable. If you don’t already have an account, visit our website to learn more.
We recommend that you speak to a tax advisor or a NYSLRS customer service representative before taking a taxable loan. For more information about taking a loan from NYSLRS, visit our Loans page.