There may be tax penalties if you receive a refund prior to the age of 59 ½.
You have options to consider when requesting a return of your contributions. Whichever option you choose it will be reduced by any overpayments, offsets or applicable taxes. Your payment options are:
- Have all of your refund paid to you (lump sum payment);
- Rollover your entire refund amount to one or more eligible plans (direct rollover);
- Take a partial rollover and a partial lump sum payment to yourself.
Gross refund. The amount of your refund is the total amount of contributions and interest you have in the Retirement System. Interest on your contributions, which is calculated at the rate of 4% compounded annually on your prior year ending balance, is included in your refund.
Tax Effects on Payment Options
Previously taxed contributions. Any previously taxed contributions will not be taxed again when they are paid to you. Any contributions made to the Retirement System prior to the following dates were previously taxed:
- Teachers' and State Employees' Retirement System: July 1, 1982
- Local Governmental Employees' Retirement System: varies, depending upon your employer. See your employer for details.
- Consolidated Judicial Retirement System: August 1, 1983
- Legislative Retirement System: November 1, 1986
Federal tax. The Retirement Systems Division will automatically withhold 20% of the taxable amount for federal income tax if your refund is paid directly to you. If you are younger than 59 ½ and elect to receive a lump sum or partial lump sum payment, you are responsible for the additional 10% income tax due to the federal government for the early distribution penalty when you file your income tax at the end of the year. Please contact the IRS for more information (Internal Revenue Service (irs.gov)).
North Carolina tax for residents. If you had five or more years of maintained creditable service in the Retirement System as of August 12, 1989, your refund is completely exempt from North Carolina income tax. Otherwise, if you are a resident of North Carolina, or if you chose to have North Carolina taxes withheld, the Retirement System will withhold 4% of the taxable amount. Be aware that properly estimated tax withholdings do not ensure that the withholdings were sufficient to avoid penalty. For further information regarding penalties for failure to properly pay your income tax, please contact the North Carolina Department of Revenue (NCDOR).
Rollover. However, you can defer paying income taxes by rolling over your refund to a traditional IRA (individual retirement account) or another eligible employer plan. The Retirement System will withhold no income taxes on the part of your refund that you roll over. By rolling over your refund, you may also avoid an additional penalty assessed by the Internal Revenue Service for withdrawing your retirement contributions prior to age 59 ½. Please note, that the rollover payment will be mailed to your mailing address for you to deposit. We cannot mail the rollover check directly to the rollover institution. Click here for more information on rolling over a refund.
Non-Resident North Carolina Tax withholdings: If you are not a North Carolina resident, you have a choice to have North Carolina income taxes withheld at the rate of 4%. Select YES and NC taxes will be deducted from your refund. Select NO and NC taxes will not be deducted from your refund, but you may have a tax liability due to North Carolina when you file your taxes at the end of the year. Consult with your tax advisor for the best option for your situation.
Taxable Amount: This is the total account balance that is subject to a potential tax liability should you receive a refund.
Non-Taxable Amount: This includes any previously taxed contributions and will not be taxed if they are paid to you.
Total Balance: This is the total of your “Taxable” and “Non-Taxable” amounts. It does not include applicable interest.