How an NYPD pension loan works in Tier 2 and Tier 3, why a loan you paid back can still cost you, and what the shortage, excess and final withdrawal lines on your statement mean.
The short answer. A pension loan lets you borrow against your own contributions, but the cost can follow you into retirement. In Tier 2, every pension loan leaves a shortage in your account, even one you pay back in full, and a shortage still there when you retire cuts your pension for life. In Tier 3, a loan balance you still owe when you retire cuts your pension for life unless you pay it off at retirement.
The rules below come from the Police Pension Fund’s own booklets. Read the section for your tier.
Not sure of your tier? It’s set by the date you were appointed: before July 1, 2009 is Tier 2, on or after is Tier 3. Lesson 1 covers it.
All of these print on your Fund statement. Our statement reader walks through the Shortage, Excess and final withdrawal lines one at a time.
Up to 90% of your accumulated contributions plus interest, counting any loan you already have (Tier 2 booklet, June 2026, p.10). That limit is for a loan while you’re working. It is a different number from the final withdrawal you can take at retirement, which is covered below.
The booklet says repayment on all loans must be done before your 63rd birthday (p.10). If you’re planning to work past 63 now that the mandatory retirement age has changed, confirm your payoff date with the Fund in writing.
Miss your loan payments for 90 days and the loan is in default (p.12).
Your Tier 2 account earns 8.25% a year (p.7). A pension loan is paid back at 4% (p.11). While the money is out on loan, it earns 4% instead of 8.25%, and the 4.25% it didn’t earn is gone. The booklet says it plainly: the lost interest creates a shortage, even if you repay the loan (p.13).
So the question for a Tier 2 member isn’t only “did I pay it back?” It’s “what shortage did it leave, and is it still there?”
A shortage you haven’t paid down by the time you retire reduces your pension for life. The Fund turns the shortage into a yearly cut using its own tables. The booklet’s own example: a member who retires at 45 with a $50,000 shortage has the pension cut by $4,088 a year, every year (p.13). That example is the booklet’s, not ours, and your cut depends on your own shortage and age.
Loans aren’t the only cause. Stopping your contributions before you’re eligible to retire also creates a shortage (p.9).
A pension loan isn’t taxed as long as it stays inside the federal limits and its terms are met. It can become taxable if it’s too large once it’s added to any loan from your 457 (the federal limit counts the two plans together), or if the loan’s terms aren’t met, for example a balance left unpaid. The federal rules have several moving parts, so take the specifics of your own loan to a tax professional before you borrow.
These two aren’t loans, but they come out of the same account, and both decide how much pension you’ll get for life.
If your account holds more than the required amount, the extra is your excess. If you leave it there, the booklet says your pension is increased by its actuarial value, meaning its worth paid out as a lifetime amount, when you retire (p.10). With 20 or more years and no shortage, you can apply for a refund of it instead. The taxable part of a refund has 20% withheld for federal tax unless you roll it straight into an IRA (p.10).
Unsettled: what taking the excess does to your pension. Page 10 of the booklet says leaving the excess in raises your pension, so taking it gives up that raise. Page 14 says a final withdrawal, which can include the excess, reduces the pension for life. The two pages don’t clearly agree on which happens to the excess part. We don’t pick one. Ask the Fund, in writing, what taking your excess would do to your pension.
At retirement, a Tier 2 member can take a final withdrawal, which the Fund sometimes calls a “final loan.” The limit is up to 90% of your required amount, as well as some or all of your excess (p.14). Page 12 of the same booklet prints only the 90% part, so don’t be thrown if you see the smaller figure quoted.
The booklet says a final withdrawal “has the same effect as creating a shortage,” so your pension is reduced for life (p.14). In plain terms, cash now for a smaller check every month after.
Tax: the taxable part has 20% withheld for federal tax. It may also carry a 10% early withdrawal penalty unless you leave service at 50 or older or have 25 years of service. That exception removes only the penalty, not the 20% withholding. A direct rollover to an IRA avoids both. These are federal rules with real exceptions, so check your own case with a tax professional.
The Fund prints your available final withdrawal on your statement. The statement reader shows how it’s built from your required amount and excess.
If your membership began on or after January 1, 2018, you can borrow the lesser of $50,000 or 50% of your contributions. Members who joined earlier have a different limit, printed on page 9 of the Tier 3 booklet.
The part that matters most: if you retire with a loan balance still owed, your pension is reduced for the rest of your life. You can avoid that by paying off the balance in one lump sum when you retire (Tier 3 booklet, June 2026, pp.9-10).
Tier 3 has a required amount too: your 3% contributions plus statutory interest (p.7). If your balance falls below it, you have a shortage. In Tier 2, a shortage shrinks your pension. In Tier 3 the booklet says there is no such offset, and “a member cannot collect a retirement benefit with a shortage” (p.8). In other words, the pension waits until the shortage is paid.
Our what to have ready list includes the loan question and where to find each answer. Then ask the Police Pension Fund:
Once the Fund gives you those numbers, the trade-off of cash now against pension for life is a question about your whole household: what else is coming in, who depends on the pension, and for how long. That’s the work a financial plan does.
Sources: NYC Police Pension Fund, Tier 2 Summary Plan Description, June 2026, pp.7, 9-14; NYC Police Pension Fund, Tier 3 Summary Plan Description, June 2026, pp.7-10; Internal Revenue Code §72 (loans treated as distributions, §72(p); the 10% additional tax and the public safety exception, §72(t)); IRC §3405(c) (20% withholding). Tax rules change and have exceptions; confirm the specifics with a qualified tax professional.
Leave your first name and email and we’ll send each lesson as it goes up. When you’re ready, we’ll also work out your own numbers before any call, so the call is about decisions, not data entry.
The first email is the NYPD Retirement Checklist. Your name and email go to Sirmium Capital, and a person on our team reads every reply. You can stop the emails in one click.
Educational only. Not investment advice. Sirmium Capital LLC is a New York state-registered investment adviser and is not registered with the SEC. Confirm every figure and date with the New York City Police Pension Fund before acting.