Tax savings tip for MCPS retirees

MCPS retirees who participate in the 403(b) retirement savings plan and also have funds in an IRA can potentially reduce their Maryland income tax bill by using a little-known feature of the 403(b) plan.

Under Maryland law, retirees age 65 and older are exempt from paying tax on a limited amount of  403(b) plan withdrawals if their Social Security income is below a certain threshold and their other pension income is below a certain amount.  And for those whose Social Security income exceeds the annually-set threshold, they can suspend their Social Security benefits between full Social Security retirement age and age 70 to take advantage of the 403(b) withdrawal exemption.  (Consult a financial adviser to determine if this is the best strategy for your situation.)

IRA withdrawals are, however, fully taxable as ordinary income.

But under a little-known provision of the MCPS 403(b) plan, retirees who are still classified as "active employees" (so that they can take substitute and temporary positions) can transfer funds from their IRA into the MCPS 403(b) plan.  Those funds can then be withdrawn free of Maryland income tax if the participant's Social Security income and other pension income is below a certain threshold.   Contact Fidelity for information about transferring IRA funds to your 403(b) account.

This means that some astute taxpayers can entirely avoid paying taxes on income saved for retirement and gains on that income.  This is even better than a Roth savings plan.

For more information, see:

https://taxes.marylandtaxes.gov/Individual_Taxes/Individual_Tax_Types/Income_Tax/Filing_Information/If_You_Are_a_Senior_Citizen/Maryland_Pension_Exclusion.shtml?fbclid=IwAR0dJWW6Y_P4I7v2UJbYYRma3iGAdcnz8Uco6BBA9Pl2zreRpfxWvb0fG0Y