Chris Stein, CFP®
Can You Minimize the Impact of GPO?
The question this week is from someone asking how to minimize the impact of GPO on his wife’s non-covered pension and his Social Security benefits.
“My wife is a schoolteacher in the 401(a) Defined Contribution Plan within the Ohio State Teachers Retirement System (STRS). In addition to her teacher’s retirement account, I have a defined-benefit pension from work. We plan to retire at age 62 and defer taking my Social Security benefit until age 67, possibly 70. My projected monthly SS income will be roughly $3,000 per month. One of my concerns has been that her retirement plan will subject her to the GPO and reduce her spousal benefit by 2/3 of her pension amount. I am projecting her account balance would be about $400,000 by age 62, 100% vested in both employee and employer contributions.
Would it be a good strategy to roll over her account balance into another qualified account (IRA) at age 62, as I understand is possible? We would use this money first, to fund our ‘minimum dignity floor’ expenses during our first five years of retirement, taking advantage of our tax planning window. Also, if these funds were then completely drawn out by age 67, would that eliminate the potential GPO reduction on her spousal SS benefit? Is this a legitimate way to avoid the GPO reduction? Are there any pitfalls that would argue against this strategy? I’d love to hear your thoughts on this.”
GPO – What It Is
It would be a grand strategy to minimize the impact of GPO if it worked. It doesn’t work because that’s exactly what people would do to avoid the GPO. First, let’s clarify what the GPO is. GPO stands for Government Pension Offset. It’s the cousin to the WEP – Windfall Elimination Provision. Both are related to rules in place that apply to people who have what are called non-covered pensions. Some government agencies are allowed to supply an alternative to Social Security, so you don’t pay into Social Security but participate in this pension instead. This is going to affect public-sector employees, for the most part.
In your wife’s case, a 401(a), which is very similar to a 401(k), is being used essentially as an alternative system to Social Security. Both the Ohio-based system and your wife are putting money into this 401(a), instead of putting money into Social Security. Your concern is that she will be subject to the GPO, which states that her spousal benefits will be reduced by $2 for every $3 of her non-covered pension if she claims spousal benefits based on your Social Security. And, if you were to pass away, her survivor benefits would be affected the same way.
How to Know the Offset
What gets a little confusing is that your wife doesn’t have a traditional pension where it’s a monthly payment amount. She has what is essentially a 401(k), a lump of money of about $400,000. That’s replacing Social Security, and they do treat it just like it’s a monthly pension. To know how much the 2/3 offset will be because of WEP, you have to know the monthly benefit. But because it is a lump sum, you will only know exactly how much the offset will be in one of two ways:
Either the Ohio State pension system itself will tell you what the equivalent monthly benefit is – which some pension funds do – and that’s the number you use; or
If they never provide that, the IRS and Social Security have their own table where you look up that value ($400,000) and your age at your entitlement date and do the conversion to know what the monthly equivalent value of that is.
One or the other is going to happen, no matter what you do with the money. You cannot hide it. You cannot roll it out and spend it. You cannot do anything to avoid this. This is going to happen.
The only thing you can do is delay taking any money out of that account (which includes rolling it over). During the time you’re collecting Social Security and you’re not touching one penny of that money, WEP and GPO don’t apply. However, when you become ‘entitled’ to that money, WEP and GPO do apply. According to the rules, you become entitled the moment you start taking that money out, including rolling it over, even if you roll it over and don’t touch it. If you leave it in the 401(a) untouched, it is not considered in force, and you can be collecting some Social Security before that.
Minimize the Impact of GPO?
You mentioned you are both 62 and want to retire at 62, living on the funds in the 401(a) for five years until you reach your full retirement age at 67. When you turn on your Social Security at 67, your wife will be allowed to collect a spousal benefit. However, you mentioned you have ample other assets, so you may be able to minimize the impact of GPO. If your wife does not move her 401(a) fund and you live off your other assets instead, she will be able to collect the spousal benefit without a GPO offset. When RMDs from that 401(a) begin at her age 70½, Ohio State will report that to the Social Security Administration, who will start to apply GPO to her spousal benefit.
Remember, though, that you can delay starting payment of RMDs until April 1 of the year following the year you turn 70½, so she might be able to buy an extra year. That way, by living off your other assets, she could get a few years of spousal Social Security without having GPO applied to it.
The pension amount from the lump sum will be imputed using either Ohio State’s calculation or Social Security’s. When they come up with their estimate, which has been calculated actuarily, it cannot be appealed. They’re going to impute the pension, take 2/3 of that pension amount, and reduce your wife’s Social Security spousal or survivor benefit by that amount.
Whatever strategy you choose, you’d have to really crunch those numbers to know what makes the most sense.
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