How to Cash Out a PERA
Public employees can plan for their retirement by opening a PERA account. Public Employees Retirement Accounts are designed to function like traditional IRAs. You decide how much you want to contribute, and your employer matches your contributions up to the maximum allowable amount. You can cash out your PERA account when you stop working for your public employer. If you cash out before you reach 59 1/2 years old, it may trigger an early withdrawal penalty or income tax liability.
You have two options when cashing out your PERA account, and each one has a different tax implication. You can roll the amount over into an existing IRA account or into a new employer’s retirement account if that plan will accept it. There is no federal or state tax liability when rolling over your account within 60 days. Your alternative is to take a lump-sum cash distribution from your account. By law, your PERA plan administrator must withhold federal income tax from your account and send it to the Internal Revenue Service. That amount is credited against your potential tax liability.
Most PERA plan administrators have a termination form that you can download online. You must complete and submit the termination form before you can cash out your account. Your signature must be notarized by a state notary, or your form will be rejected. Depending on your state’s law or plan regulations, you may have to wait a certain number of days before the account can be liquidated. An IRS penalty for early withdrawal also is in the cards if you're too young.
Avoiding PERA Cash-Out Penalties
You can avoid the IRS early withdrawal penalty if you cash out your PERA account to pay medical expenses. To qualify, you must use the money for unreimbursed medical bills that exceed 7.5 percent of your adjusted gross income. You should keep your receipts as proof that you used your PERA funds for qualified purposes. You can also use the funds to pay for health insurance coverage for yourself and your dependents. To qualify, you must have lost your job and received federal or state unemployment benefits for a minimum of 12 weeks.
Other Tax-Free Cash-Outs
If you are disabled or become disabled, you can cash out your PERA account without paying an early withdrawal penalty. Be prepared to provide medical proof that you are physically or mentally disabled and that your disability prevents you from being employed. The IRS also allows you to take tax-free PERA cash out if your area is hit with a natural disaster. The IRS gives you three years to pay any income tax you owe on the cash-out amount.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.