Pension contributions: Amounts that employees (or employers on their behalf) pay into funds. Individuals with IRAs also make contributions.
Pension distributions: Payments to employees from an employer-funded retirement plan for past services. Individuals with IRAs also receive distributions.
Massachusetts previously taxed contributions: Contributions for which a Massachusetts deduction was not allowed at the time an individual contributed to certain retirement savings accounts such as an IRA account.
Individual Retirement Account (IRA): A retirement plan to which an individual may contribute a maximum amount annually. For joint filers, each may contribute up to the maximum amount allowable. Earnings accumulate tax-free on IRA contributions and depending on the type of IRA, distributions may or may not be taxable.
There are 2 types of IRAs:
Employee Retirement Plan (ERP): Usually a pension, profit-sharing, or stock bonus plan that qualifies for preferential tax treatment, provided by an employer who wants to give retirement benefits to employees. This includes:
- Tax exemption for the fund
- Deductions by the employer for contributions made to the fund
- Tax deferral for the employee for the employer's contributions and earnings
- In some instances, favorable tax treatment of distributions
Designated Roth accounts in certain retirement plans
For taxable years beginning after December 31, 2010, participants in government-sponsored plans can treat elective deferrals as Roth contributions.
A designated Roth account allows new or existing 401(k), 403(b), or governmental 457(b) plans to accept designated Roth contributions and certain rollovers. It is a separate account that holds designated Roth contributions. If a plan adopts this feature, employees can designate some or all of their elective contributions (also referred to as elective deferrals) as designated Roth contributions, rather than traditional, pre-tax elective contributions.
You can include, in your gross income in the year you contributed, the amount you contributed to a designated Roth account. However, eligible distributions from the account (including earnings) are generally tax-free.
The employer must separately account for all contributions, gains and losses to this designated Roth account until this account balance is completely distributed.
Massachusetts follows the federal treatment for the following:
- You can include, in gross income for the year you contributed, contributions to a designated Roth account. (See "Current year exclusion amounts for elective deferrals, including 'catch-up' contributions" below for current year exclusion amounts for elective deferrals).
The combined amount you can contribute to 401(k), 403(b) or governmental 457(b) plans designated Roth accounts and traditional, pre-tax accounts in any 1 year is limited to $17,500.
If you're age 50 or older, the maximum contribution is $23,000 ($17,500 regular and $5,500 regular catch-up contributions).
In addition to designated Roth account contributions, you may also contribute to standard Roth IRAs, limited to $6,500 ($5,500 regular and $1,000 catch-up IRA contributions).
- Income earned on the contributions while in a designated Roth account is excluded from gross income.
- Distributions from a designated Roth account (contributions and associated earnings) are excluded from gross income if:
- 5 years have passed since January 1 of the year in which the first contribution (including rollovers) was made to your Roth account, and
- You are at least 59 and a half years old (or disabled or deceased)
If the requirements for a qualified distribution are not met, and the assets are not rolled-over to another eligible plan, the earnings portion of the distribution will be taxable.
A retiring employee who transfers all or part of the assets from 1 qualified pension plan to another, similar, qualified pension plan within 60 days will not recognize any income from the transfer to the extent that no income is recognized for federal income tax purposes.
For tax years beginning on or after January 1, 2002, Massachusetts follows the current federal law and allows the following tax-free direct rollovers:
- Traditional IRA rolled over to another traditional IRA
- Traditional IRA rolled over to a qualified employer retirement plan
- Qualified employer retirement plan rolled over to a traditional IRA
- Qualified employer retirement plan rolled over to another qualified employer retirement plan
Qualified employer retirement plans include:
- Qualified employer retirement plan under 401(a)
- Annuity contract under 403(a)
- TSA and TIAA-CREF retirement plan under 403(b), and
- Governmental deferred compensation plan under 457, but not private sector 457 plans
If a rollover is tax-free for federal purposes, it's also tax-free for Massachusetts purposes. The following rollovers are tax-free:
- Keoghs under 401
- CODA plans under 401(k)
- SEP plans under 408(k), and
- SIMPLE plans under 408(p)
Rollovers that do not qualify as tax-free rollovers:
- Traditional IRA rolled over to Roth IRA
- Qualified employer retirement plan rolled over to a Roth IRA
- Indirect rollover, unless specifically excluded from gross income
Workplace retirement plan contributions
For tax years beginning on or after January 1, 2002, Massachusetts sticks to the following sections of the Internal Revenue Code:
- §§ 62(a)(1)
- 274(m) and (n)
- 401 to 420 inclusive (but excluding §§ 402A and 408q)
- 3401, and
All retirement plan contributions and distributions that are excluded from federal gross income are also excluded from Massachusetts income for the plans below.
Massachusetts follows federal law for maximum exclusion amounts, as well as treatment of:
- Elective Deferrals
- Catch-up contributions, and
- Qualified rollovers of plan proceeds for:
- § 401(k) plans - Qualified Cash or Deferred Arrangements (CODA)
- § 403(b) plans - Tax-Sheltered Annuity Plans (TSA) and Teacher's Insurance and Annuity Association and College Retirement Equities Funds (TIAA-CREF)
- § 457 plans - Massachusetts Government Employees Deferred Compensation Plans
- § 408(k) plans - SEPs (Simplified Employee Pensions), and
- § 408(p) plans - SIMPLE (Savings Incentive Match Plans for Employees) IRAs
The maximum amount of excludable salary deferrals, as well as the additional exclusion allowed for age 50 catch-up contributions, will increase in following tax years according to tables in the I.R.C and provided adjustments for cost-of-living adjustments.
In Massachusetts, employers taxed under Chapter 62 of the I.R.C. are allowed a deduction for employer contributions to qualified plans and other retirement plans.
When calculating adjusted gross income, Massachusetts generally allows the deductions available under § 404. However, the § 404 deductions for contributions on behalf of sole proprietors and partners is not allowed.
Current year exclusion amounts for elective deferrals, including "catch-up" contributions
SIMPLE IRA governed by IRC Section 408(p):
|Tax year(s)||Maximum exclusion||Additional exclusion for catch-up|
|2013 and 2014||$12,000||$2,500|
Sections 401(k), 403(b), 457 plan or 408(k) SEP:
|Tax year(s)||Maximum exclusion||Additional exclusion for catch-up|
|2013 and 2014||$17,500||$5,500|
Nonresident pension distributions
Massachusetts will not tax pension income received by nonresidents if the income is from any of the following:
- A qualified trust under I.R.C. § 401(a) exempt from taxation under I.R.C. § 501(a)
- Simplified I.R.C. § 408(k) plans
- I.R.C. § 403(a) annuity plans
- I.R.C. § 403(b) annuity contracts
- I.R.C. § 7701(a)(37) individual retirement plans
- eligible deferred compensation plans of state and local governments and tax-exempt organizations as defined by I.R.C. § 457
- I.R.C. § 414(d) government plans
- A trust or trusts described in I.R.C. § 501(c)(18)
- Any plan, program or arrangement described in I.R.C. § 3121(v)(2)(C) if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries, or if payments are spread over at least a ten year period. Such income is also protected from state taxation if the plans are trusts under I.R.C. § 401(a), but exceed limits laid down in I.R.C:
- §§ 401(k)
- 415, or
- Any other applicable limitation on contributions or benefits
- Non-contributory government plans
- Military pensions of nonresidents
Documents to submit with abatement/amended tax return
- Copy of U.S. Form 1099-R - Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts
- For rollovers: Statement documenting rollover
- For nonresident pension distributions: Verification of residency on the date of distribution