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Taxes on Your Retirement Benefits

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Taxes on Your Retirement Benefits Powered By Docstoc
					Public School Employees’ Retirement System




              Let’s Talk About




   Taxes on Your
             Retirement
                     Benefits




Publication # 9600                2/2009
The information contained in this publication
is intended only for general guidance and
does not cover every relevant tax law. PSERS
must conform to the Internal Revenue Code
and other federal and Pennsylvania statutes.
The provisions of the Internal Revenue Code
or other applicable statutes supersede the
information contained in this publication.

The disclaimer of liabilities contained in this
publication apply to written or oral information
or advice you may receive from PSERS.

We encourage you to seek advice from your
tax consultant or the Internal Revenue Service
(IRS).
Table of Contents

Taxes on Your Benefit ...................... 1

Understanding Your Contributions
  & Interest — Definitions ............ 2

Refunding Your Contributions
   & Interest ................................... 3

    Federal Tax Withholding on
       Lump-Sum Payments ............ 4

    Receiving a Retirement
      Benefit .................................. 7

Rollover Information for
   Refunds and Retirements ..........11

Retirement Under Age 55 .............. 14

Retirement Over Age 55 ................ 15

Retirement at Age 75 or Older ....... 16

Disability Retirement ..................... 16

Members with a Frozen Annuity .... 17

Monthly Retirement
  Benefit Taxation ....................... 17

Monthly Retirement Benefit Federal
  Withholding .............................. 18

Tax Statement Form 1099-R ......... 21

Contacting PSERS ....................... 24
    Taxes on Your Benefit

    This pamphlet provides a general
    description of the taxation methods
    in effect at the time of publishing this
    pamphlet. If you retired before
    November 19, 1996, other methods of
    federal taxation may apply.

    PSERS suggests you obtain Internal
    Revenue Service (IRS) Publication 575,
    Pension and Annuity Income (including
    Simplified General Rule) or Publication
    939, General Rule for Pensions and
    Annuities for tax regulations specific to
    your date of retirement.

    IRS publications are available from
    the IRS by calling 1-800-829-3676
    or by accessing the IRS website at
    www.irs.gov.

    You may want to consider consulting a
    tax professional, such as an accountant,
    before you complete your PSERS Ap-
    plication for Retirement (PSRS-8) or
    PSERS Refund Application (PSRS-59,
    1244, or 1246). For information
    regarding the specific taxation of your
    pension benefits, please consult a tax
    professional or the IRS. PSERS cannot
    provide individual tax advice.

    PSERS is considered a qualified trust under
    Section 401(a) of the Internal Revenue Code
    and is a defined benefit plan.



1
Understanding Your
Contributions & Interest —
Definitions

Contributions and Interest

Your contributions and interest include:

   All retirement contributions deducted
   from your paycheck.

   Any purchase of service payments
   you made.

   Funds paid on Purchase of Service
   from a distribution rolled into
   PSERS.

   Interest applied to contributions.

Pickup Contributions

Pickup contributions are regular retire-
ment contributions deducted from your
paycheck after December 31, 1982,
(excludes purchase of service install-
ment payments).

Pickup contributions are excluded from
your gross income for federal tax
purposes only and are federally tax
deferred. You pay federal tax on these
contributions when you receive the
money as part of your retirement benefit
or refund.




                                           2
    Pre-87 Investment in Contract

    Pre-87 Investment in Contract
    contributions are:

       All regular retirement contributions
       received by PSERS prior to
       January 1, 1983.

       All purchase of service payments
       received by PSERS before
       January 1, 1987.

    Post-86 Investment in Contract

    Post-86 Investment in Contract
    contributions are all purchase of service
    payments received by PSERS after
    December 31, 1986.

    Total Investment in Contract

    Total Investment in Contract contri-
    butions include both:

       Pre-87 Investment in Contract.

       Post-86 Investment in Contract.


    Refunding Your
    Contributions & Interest
    A refund of all of your contributions and
    interest within one tax year represents
    a qualified lump-sum distribution for
    federal income tax purposes. More
    information regarding a refund payment
    and federal taxes is available on
    PSERS refund applications.

3
Federal Tax Withholding on
Lump-Sum Payments

Receiving a Refund

If you elect to receive your taxable
contributions and interest paid directly
to you, PSERS must withhold a
mandatory 20% federal withholding tax.
Your tax liability on the payment may be
more or less than 20%, based on your
total taxable income for the year in which
you received the payment.

Payment of Investment in Contract

If you have any Investment in Contract
contributions in your PSERS account,
no tax will be withheld. Taxes were
previously paid on these contributions.


Taxation of Lump-Sum
Distributions

Your refund may be eligible for one or
more of the following favorable tax
treatments:

   Rollover

   You may elect to have PSERS
   directly roll over your taxable con-
   tributions and interest to an eligible
   retirement plan willing to accept the
   rollover. This would defer taxation
   of the money until you withdraw the
   money from that plan.


                                             4
        If you choose to have your refund
        sent directly to you after you receive
        the taxable contributions and
        interest, you have 60 days to place
        the money in an IRA or any other
        eligible retirement plan. The 20%
        federal withholding tax originally
        withheld by PSERS may be
        recovered when you file your federal
        income tax return.

        If you want to roll over 100% of the
        taxable portion of your lump-sum or
        partial lump-sum payment, you will
        have to replace the money withheld
        for federal taxes out of your own
        money.

    Contributions and interest for non-qualifying
    service are not eligible to be rolled over. A
    separate payment would be made to you
    minus a mandatory 10% federal tax
    withholding.


    Terminating Service Before Age 55
    & Refunding

    If you terminate service before age 55
    and choose to receive a lump-sum or
    installment payments before age 59 1/2,
    an additional 10% penalty tax may apply
    to the taxable portion of any refund
    payment received before age 59 1/2.
    To avoid this additional tax, you may
    choose to do one of the following:

        Elect a direct rollover to an eligible
        retirement plan.

5
   Roll over the refund payment to an
   IRA or other eligible retirement plan
   within 60 days of receipt.

   Defer payments until age 59 1/2.


Refunds & State Income Tax

If you reside in Pennsylvania, no portion
of your refunded contributions and
interest is subject to Pennsylvania state
or local income tax. If you reside in
another state, you must check with your
state and local authorities to determine
your tax responsibility. If the state where
you reside taxes your benefit, you must
pay your taxes directly to your taxing
authority. PSERS cannot withhold state
taxes from your refund payment.


Refunds & The IRS Form 1099-R

The IRS Form 1099-R is used when
preparing your annual federal income
tax return. The Form 1099-R shows the
amount of money you received from
PSERS during the previous calendar
year and provides a breakdown by
distribution code of the following
information: gross distribution, taxable
amount, and tax withheld.

PSERS will automatically send your
Form 1099-R by the end of January
following the calendar year in which your
refund was paid. If you have not received

                                              6
    your Form 1099-R by February 10,
    contact PSERS for your duplicate copy,
    or you may access a copy via the
    PSERS website at:

           www.psers.state.pa.us.

    Obtaining a copy from the PSERS
    website will require you to register
    through the website as a site user.
    Once registered, you will be able to
    obtain your information through a secure
    server using your own personal pass-
    word.

    Please remember to notify PSERS of
    any address or name change between
    the time you receive your refund
    payment and the mailing of your Form
    1099-R.


    Receiving a Retirement
    Benefit

    If you elect to withdraw any portion of
    your contributions and interest, this type
    of withdrawal is classified as a partial
    lump-sum payment and is deemed by
    the IRS as a non-periodic payment.
    Your monthly retirement payment is a
    periodic payment according to the
    Internal Revenue Code. Any retroactive
    retirement payment may be treated as
    periodic or non-periodic based on the
    nature of the payment.



7
The IRS has various rules for taxing
partial lump-sum payments and monthly
retirement benefit payments.


Special Rule for Partial
Lump-Sum Payments

The federal Technical and Miscella-
neous Revenue Act of 1988, allows a
PSERS retiree to immediately exclude
an amount up to the Pre-87 Investment
in Contract from federal taxation.

To qualify you must:

   Receive all of your Pre-87 Invest-
   ment in Contract as a partial lump-
   sum payment at time of your first
   retirement benefit check.

   Roll over your Pre-87 Investment in
   Contract as a partial lump-sum
   payment at time of your first
   retirement benefit payment to a plan
   that will accept rollovers of previously
   taxed funds.

   Receive or roll over a portion less
   than the total of your Pre-87
   Investment in Contract as a partial
   lump-sum payment with your first
   retirement benefit check. If you elect
   to receive or roll over an amount less
   than the total Pre-87 Investment in
   Contract, you will recover the



                                          8
       remainder of your Investment in
       Contract over the life of your annuity
       using the IRS Simplified General
       Rule Method. (See page 10.)

    NOTE: Any installment payments of the
    Pre-87 Investment in Contract taking
    place after you receive the first
    retirement benefit check will be taxable,
    and you will receive a tax credit through
    the IRS Simplified General Rule Method.

    If you elect to leave your Pre-87 Invest-
    ment in Contract money in your account
    and receive it as part of your monthly
    annuity check, the IRS Simplified
    General Rule Method applies. (See
    page 10, “IRS Simplified General Rule
    & How it Works.”)


    Post-86 Investment in Contract
    Recovery

    If you elect to withdraw your Post-86
    Investment in Contract as a portion of
    your partial lump-sum, the amount is
    subject to the regular 20% federal tax
    withholding. You will recover the tax
    exclusion amount of your Post-86
    Investment in Contract under the IRS
    Simplified General Rule method. (See
    page 10, “The IRS Simplified General
    Rule.” )




9
The IRS Simplified General Rule

The application of the IRS Simplified
General Rule results in a monthly
exclusion based on the amount of your
Investment in Contract and the ex-
pected number of monthly payments.

This exclusion will remain constant over
the life of your annuity until you have
excluded all of the Investment in Contract
to your credit.

The exclusion will be applied if you have
Investment in Contract and either:

   Elect to receive only a monthly
   benefit.

   Have any Pre-1987 Investment in
   Contract remaining after you receive
   a partial lump-sum payment with
   your first annuity payment.

   Have been granted and are
   receiving a disability retirement
   benefit from PSERS.

IRS Simplified General Rule &
How it Works

The method determines the nontaxable
and taxable amount of each monthly
retirement check.

If you retired and selected the Maximum
Option or Option 1:



                                        10
     The remaining Investment in Con-
     tract money is divided by the number
     of anticipated monthly payments the
     IRS projects you will receive over the
     lifetime of the annuity, based on your
     age at the time of retirement. After
     you have recovered the total amount
     of your Investment in Contract, any
     subsequent monthly annuity pay-
     ments are fully taxable.

 If you retired and selected Options 2, 3,
 or the Special Option 4:

     The remaining Investment in
     Contract money is divided by the
     number of anticipated monthly
     payments the IRS projects you will
     receive over the lifetime of the
     annuity, based on your age at the
     time of retirement combined with the
     age of your survivor annuitant. After
     you have recovered the total amount
     of your Investment in Contract, any
     subsequent monthly annuity
     payments are fully taxable.


 Rollover Information for
 Refunds and Retirements

 Your lump-sum (refund) or partial lump-
 sum (retirement) is eligible to be rolled
 over into an “Eligible Retirement Plan.”

 Eligible Plans

 PSERS allows you to roll over your
 funds into the following “Eligible Retire-
 ment Plans”:

11
   Individual Retirement Account
   (IRA-regular)

   Roth IRA

   A 403(b) tax sheltered annuity

   A governmental 457(b) deferred
   compensation program

   A Simplified Employee Pension
   (SEP)

   A Safe Harbor 401(K)

   Other qualified plan as described in
   Section 401(a) of the Code

As the named account holder, you must
be the primary beneficiary and/or sole
owner of the “Eligible Retirement Plan.”

Ways to Roll Over Your Funds

There are two ways to roll over your
contributions and interest:

   Direct Rollovers

   You authorize PSERS to send the
   rollover directly to an eligible
   retirement plan’s administrator by
   completing the PSERS Authoriza-
   tion for Direct Rollover (Refund)
   form (PSRS-1243) with either the
   Application for Refund (PSRS-59),
   or the Application for Refund - In-
   stallments (PSRS-1244), or by
   submitting the Authorization for
   Direct Rollover (Retirement) form

                                       12
     (PSRS-1264) with the Application
     for Retirement (PSRS-8).

     The only forms PSERS will accept
     to process rollovers are the PSERS
     Authorization for Direct Rollover
     forms. We will not roll your money
     using a private company’s authori-
     zation form.

     Non-Direct Rollovers

     You may choose to have the lump-
     sum or the partial lump-sum
     portion(s) paid to you. Your first
     payment will consist of any eligible
     nontaxable distributions you wish to
     receive. PSERS must withhold 20%
     federal withholding tax on the
     taxable portion of your payment.

     Within 60 days of receipt of your
     payment, you may elect to roll over
     your distribution to an eligible
     retirement plan. Under these
     circumstances, you would be
     responsible to execute the rollover
     with your financial institution.

     For non-direct rollovers, your financial
     institution should provide you with the
     necessary forms to complete. You
     may be able to recover your withheld
     taxes when you file your federal
     income tax return.



13
Rollovers - Age 70 1/2

The IRS has special rules about
rollovers and distributions when you
reach age 70 1/2. PSERS may not be
able to roll 100% of your contributions
and interest on your behalf. You must
begin to receive a minimum amount from
your IRA or other plan by April 1 st
following the tax year in which you attain
age 70 1/2.

Rolling Your Monthly Benefit

IRS regulations do not permit you to roll
over your monthly retirement benefits.
You may only roll over contributions and
interest (partial lump-sum payments).

Retirement Under Age 55

Tax on Early Distributions

The IRS imposes a 10% tax on early
distributions. The tax on early distribu-
tions is on the taxable portion of any
partial lump-sum payment(s).

You are subject to this tax if you are
under age 55 in the year that you
terminate service and choose to receive
any partial lump-sum payment(s) before
reaching age 59 1/2.

PSERS does not deduct the tax on early
distribution from your partial lump-sum
payment. You are responsible for paying
the 10% tax on early distributions directly
to the IRS. (See IRS Form 5329.)


                                             14
 Tax Exemption on Early
 Distributions

 You are not subject to the tax on early
 distributions if one of the following
 applies:

     You roll your contributions and
     interest into an eligible retirement
     plan and do not withdraw it from the
     plan until you reach age 59 1/2.

     You retire and choose to receive an
     amount not to exceed your Pre-87
     Investment in Contract in a single
     partial lump-sum disbursement at
     the time of first payment.

     You elect to withdraw your
     contributions and interest but
     postpone the payment until you
     reach age 59 1/2. If you make this
     selection, your contributions and
     interest will continue to earn 4%
     interest until the time of withdrawal.


 Retirement Over Age 55

 If you are at least age 55 in the year you
 terminate service, the tax on early
 distributions does not apply to you.




15
Retirement at Age 75 or
Older

Special taxation rules apply if you retire
at age 75 or older. Refer to IRS
Publication 575, Pension and Annuity
Income and Publication 939, General
Rule for Pensions and Annuities for
specific information for members
retiring at age 75 or older.

Disability Retirement

If you retire under a PSERS disability
retirement benefit, your monthly
retirement benefits are taxed the same
way as regular monthly retirement
benefits.

Disability and Pre-87 Investment in
Contract Contributions

Disability retirement does not allow for
the withdrawal of member contributions
and interest in a partial lump-sum
payment. Any Pre-87 Investment in
Contract contributions a disability
retiree may have in PSERS would have
the IRS Simplified General Rule Method
applied to the taxable rate of the
monthly retirement benefit. (See “The
IRS Simplified General Rule,” page 10.)




                                         16
 Members with a Frozen
 Annuity

 Definition

 A frozen annuity member is one who has
 received a monthly retirement benefit
 from PSERS and later returns to Penn-
 sylvania public school employment and
 again makes contributions to PSERS.

 Tax Information for You

 If your benefit is subject to the frozen
 annuity provision of the Retirement
 Code, all of the information contained
 in this publication may not apply to you.
 If you are a frozen annuity member, we
 strongly suggest you contact your local
 PSERS regional representative for
 additional information. (Refer to “Con-
 tacting PSERS” on page 24.)

 Monthly Retirement
 Benefit Taxation

 Your PSERS monthly retirement benefit
 is subject to federal taxes. Refer to
 “Completing Form W-4P” on page 20.

 Pennsylvania State & Local Taxes

 Monthly retirement benefit payments
 from PSERS are exempt from Pennsyl-
 vania state and local taxes.



17
Other States’ Taxes

If you reside in another state, you must
check with your state and local
authorities to determine the taxability of
payments made to you outside of
Pennsylvania. If the state where you
reside taxes your benefit, you must pay
your taxes directly to your taxing
authority. PSERS cannot withhold state
taxes from your monthly retirement
check.

Monthly Retirement Benefit
Federal Withholding

Completing Your Application for
Retirement (PSRS-8)

You may have PSERS withhold federal
taxes from your monthly benefit
according to the IRS Tax Tables. When
you complete your Application for
Retirement (PSRS-8), you should in-
dicate in Section 6 your withholding
choice.

Electing Tax Withholding

To have PSERS withhold federal taxes,
you must indicate your marital status
and the number of exemptions. You may
ask for an additional amount to be
withheld in addition to the marital status/
exemption amount. You also have the
option of choosing a specific amount or
a percentage withheld from each
monthly payment.

                                          18
 Electing Not to Withhold Taxes

 You may elect to have no taxes
 withheld from your monthly check.
 Electing that “no taxes” be withheld from
 your monthly check does not release you
 from your tax liability. You may be
 required by the IRS to make quarterly
 estimated tax payments to avoid an IRS
 imposed penalty.


 Incomplete Tax Withholding
 Information

 If you do not complete Section 6 of the
 PSERS Application for Retirement
 (PSRS-8), or the section is not fully
 completed, PSERS will withhold federal
 income taxes from your monthly
 retirement benefit based on the IRS Tax
 Tables using “Married with three (3)
 exemptions” as required by the IRS.

 Changing Your Withholding

 As a retiree, you may change your
 federal withholding rate at anytime. To
 change your federal withholding rate,
 you must complete and sign IRS Form
 W-4P.

 Your new tax withholding option will
 become effective six to eight weeks
 after PSERS receives your new Form
 W-4P.



19
Completing Form W-4P

When you submit Form W-4P to
PSERS, the withholding selection on
the new form supersedes any previous
tax-withholding request you made.
Please keep this in mind, especially if
you are requesting the withholding of an
additional dollar amount.


PSERS provides an online Monthly Federal
Tax Withholding Calculator to help you
estimate how much federal tax will be
withheld from your gross monthly pension
check. The calculator can be found on the
PSERS website at:
    www.psers.pa.us/calculators.htm.


Example:

You had previously elected “Married with
zero (0) exemptions,” which on its own
withheld $125. You requested an
additional amount of $25 be withheld in
addition to the $125 for a total of $150
per month federal withholding.

Later, you decide you need an
additional $50 withheld per month in
addition to the $150 already being
withheld. You want your total withholding
to be $ 200. When you complete the
new Form W-4P, you must complete it
as though you had never previously
asked for an additional amount. You
would complete the form with “Married


                                        20
 with 0 allowances” ($125) plus an
 additional withholding of $75 for a total
 of $200.

 You may obtain the IRS Form W-4P by
 contacting PSERS, through the PSERS
 website, www.psers.state.pa.us, or
 the IRS. The form is available on the
 IRS website, www.irs.gov.


 Tax Statement Form 1099-R

 Purpose of the IRS Form 1099-R

 The IRS Form 1099-R is used when
 preparing your annual federal income
 tax return.

 The Form 1099-R shows the amount of
 money you received from PSERS
 during the previous calendar year and
 provides a breakdown by distribution
 code of the following information: gross
 distribution, taxable amount, federal
 income tax withheld, and Investment in
 Contract recovered during the year, if
 any. You may receive more than one
 IRS Form 1099-R for the tax year de-
 pending on the applicable distribution
 code. PSERS must report different
 types of retirement payments on
 separate forms. For instance, if you
 retired and had PSERS roll over taxable
 contributions and interest for you, you
 should receive at least two (2) forms for
 the tax year in which the rollover
 occurred.

21
Form 1099-R Codes

In Box 7 on each IRS Form 1099-R,
there is a code shown which identifies
the distribution you received from
PSERS over the preceding tax year.
The following are the codes and the
explanation of the payment:

1    An early (premature) distribution for
    which there is no known exception
    (See IRS Form 5329.)

2   An early distribution where you have
    not reached age 59 1/2

4   A death benefit payment

7    A normal distribution (usually month-
    ly retirement benefit payments)

A   A payment that may qualify for 10-year
    averaging.

G A payment made as a direct rollover


Mailing of the Form 1099-R

PSERS automatically sends your Form
1099-R by the end of each January. If
you have not received your Form
1099-R by February 10, contact
PSERS for a duplicate copy, or you may
obtain a copy through the PSERS
website, www.psers.state.pa.us. If
your monthly retirement benefit is sent
via direct deposit or electronic transfer,

                                         22
 please remember to keep your home
 address and name current with PSERS
 for the mailing of your Form 1099-R.

 Who Receives Form 1099-R

 The following PSERS payees will
 receive an IRS Form 1099-R:

     Retirees receiving a monthly benefit

     Survivor annuitants receiving a
     monthly survivor benefit

     Refunded members who received a
     lump-sum distribution for the year of
     payment

     Alternate payees

     Beneficiaries who received a death
     benefit payment for the year of
     payment

     A deceased member’s estate for
     the filing of the deceased’s income
     tax return


 Reminder!

 PSERS receives many calls inquiring
 as to why there is a difference in the
 gross distribution and the taxable
 amount on the Form 1099-R. There are
 two possible reasons:

     There was tax-free Pre-87 Invest-
     ment in Contract money paid during


23
   the tax year. Because taxes were
   already paid on this money, the
   payment is included in the gross
   distribution but excluded from the
   taxable amount since no tax is due.

   A portion of the monthly retirement
   benefit qualified for the IRS
   Simplified General Rule. (See “The
   IRS Simplified General Rule,”
   page 10.)

Contacting PSERS

You may contact PSERS toll-free at
1-888-773-7748. We are available to
take your phone call from 7:30 a.m. to
5:00 p.m., Monday through Friday, ex-
cept on major holidays.

     Harrisburg Headquarters
           5 North 5th Street
             PO Box 125
     Harrisburg PA 17108-0125
      Toll-Free: 1-888-773-7748
   Local Telephone: (717) 787-8540

E-mail address:
     ra-ps-contact@state.pa.us

Website:
       www.psers.state.pa.us

PSERS also has regional offices
located throughout the state. Their core
operating hours are 8:30 a.m. to 5:00
p.m. You can find a complete list of all
PSERS regional offices on our website
under Regional Offices.

                                       24
Public School Employees’ Retirement System
5 North 5th Street
PO Box 125
Harrisburg PA 17108-0125

				
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