DATE:      September 17,2008

1. This letter is intended to address the taxable pension loan which is taken for the purpose of acquiring a principal residence. Apparently there is a considerable amount of misinformation among the members concerning this option, so the purpose of this letter is to try to clarify this loan and its ramifications.
   
   
2. When dealing with this loan, we are referring only to contributions made into the account before federal taxes. Contributions made before November, 1989, lump sum contributions or any 50% contributions have already been taxed and will not be further discussed for the purpose of this issue. Pursuant to IRS regulations, when a member takes a pension loan of taxable funds, in order for the loan to be non-taxable, it must be repaid within five years. Internal revenue Code 72 (p) (2) (B) (ii), however provides an exception to this rule when the proceeds of the loan are used, within a reasonable period of time to purchase a principal residence (a home you live in, not necessarily your first home purchased). The Police Pension Fund must report all loans which violate the five year rule to the IRS. However, if you feel that you are eligible for the acquisition of a principal residence exemption, you should not include the  loan amount as income on your tax return but you may wish to provide the IRS with documentation (e.g., closing statement, Photostats of checks, etc.) establishing your right to this provision. In an event the maximum amount eligible for this exception is $50,000. For members with a spouse who is also a uniformed member, each member can utilize the full $50,000 exemption. This exemption only defers federal taxes on this money, and is not available to members who are retiring.
   
   
3. Members considering utilizing this exception are strongly urged to consult with a tax professional before taking this loan. In past experience, members have occasionally had their home purchase not go through and have been dismayed to find that they were still in violation of the five year rule and received a 1099 form, incurring taxes and penalties on the entire amount. Some other members have had problems because their tax preparer was unaware of this exception. Once a member cashes the loan check, this office had no choice but to issue a 1099 and inform the IRS, therefore proper planning and professional advice is critical. If you have any questions on this issue, you should submit them in writing to the undersigned but you are reminded again, that the ultimate responsibility lies with the member, and the importance of seeking professional advice cannot be stressed enough.
   
   
4. For your information.