Ask Jack Jack Ehnes

I am considering transferring money from my tax-sheltered annuity to purchase three years of service credit. Is this wise?

Purchasing additional service credit is a personal choice. It’s recommended that you compare the cost of additional service credit with the increase it provides to your lifetime income. There are two forms of service credit: permissive service credit and nonqualified service credit.

Under permissive service credit you can purchase service credit for specific employment performed in the past, if that employment has not been previously credited. For example, if you worked as a teacher in another state for a number of years and you have terminated your membership from that retirement system, you can purchase all or a portion of your time served as a teacher in the other state. This purchased service would then be included in your CalSTRS service for retirement purposes.

Nonqualified service credit allows members who have earned at least five years of qualifying service credit to purchase up to five years of nonqualified service credit, also known as “air time.” This type of purchase does not have to be in conjunction with any form of past employment. Nonqualified service credit purchases are calculated differently from other service credit purchases. The calculation is based in part on your current salary so it increases with your accumulated service and your compensation.

Proposals have been discussed in the Legislature to eliminate the purchase of nonqualified service credit, “air time.” If such a proposal is adopted, the purchase of nonqualified service credit would not be available as of the measure’s effective date. Currently, it is anticipated that the earliest any such measures, if enacted, would take effect is January 2013.

Finally, be sure you are aware of any penalties that may be imposed by your tax-sheltered annuity if you decide to transfer those funds to purchase the service credit.

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