PERAC has no special expertise or jurisdiction with respect to issues of federal taxation. The following reflects PERAC's understanding of current federal laws relating to taxation of retirement benefits.
- Is the portion of my salary that is deducted for contribution to the retirement system subject to federal taxation?
Contributions Made Prior to January 12, 1988 and Buybacks of Creditable Service
Retirement contributions made prior to January 12, 1988 and buybacks of creditable service (whether made prior to or after January 12, 1988), are considered employee contributions and are not considered to be excludable from taxable income.
Contributions Made After January 12, 1988
Mandatory retirement contributions made after January 12, 1988 are considered pre-tax. Your employer reduces your gross salary for federal income tax purposes by your required retirement contribution amount. This reduces the amount of your income subject to federal taxation and consequently decreases the amount of federal withholding.
Private Tax Deferred Plans and Tax-Sheltered Annuities
For employees who belong to private tax deferred plans or who have purchased tax-sheltered annuities, this change with respect to January 12, 1988 could affect the maximum amount that may be contributed to such plans or annuities. Such employees should consider seeking the opinion of a tax consultant about making alterations to their voluntary plans.
- Will I be taxed by the IRS on any refunded contributions that I may receive after my resignation from public service?
Contributions Made Prior to January 12, 1988
That portion of your contributions made prior to January 12, 1988 will not be subject to federal taxation.
Contributions Made After January 12, 1988
That portion of your contributions made after January 12, 1988 is subject to federal taxation.
All interest that you receive from your account is also subject to federal taxation.
Refunds Received on or After January 1, 1993
Federal legislation may also require withholding for federal taxes on refunds received on or after January 1, 1993. When you request a refund, your retirement board will provide information on the federal requirements.
Age 59 ½
In addition, if your withdrawal takes place prior to your reaching age 59 ½, federal law may impose an additional penalty.
Superannuation Retirement Allowances
- Is any retirement allowance which I may receive tax exempt from federal taxation?
IRS Publication #17
A percentage of your superannuation retirement allowance may be excluded from taxable income. The amount of the exclusion is determined by an IRS formula related to the amount of employee contributions (for this purpose, all contributions made prior to January 12, 1988 plus any buybacks made after that date may be excluded since you have already paid federal taxes on these contributions) and life expectancy. The balance of the allowance is subject to taxation (see IRS Publication #17).
For individuals whose retirement allowance began prior to the 1987 tax year, once the full amount of employee contributions has been excluded under the three-year rule, payments are fully taxable.
Withholding For Pension or Annuity Payments
- How do I notify the federal government about my withholding preferences?
Withholding toward payment of federal income tax on your retirement allowance will be made by the retirement board in an amount to be specified by you. Retirement boards give their retirees Withholding Certificates for Pension or Annuity Payments (Form W4-P). You must complete this form and return it to your board. Your election as to whether you want withholding to apply should be made on this form. Your election will remain in effect until you revoke it. You may make any election or revoke any election as often as you wish by filing a revised form with your board.
- How is my allowance affected if I do not file the prescribed form?
If you fail to file a Withholding Certificate, federal income tax to be withheld from your pension payments will be determined as if your pension payments were wages representing your only income and you were a married individual claiming three dependents.