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Indiana Public Retirement System

Indiana Public Retirement System

Indiana Public Retirement System (INPRS) > My Fund > Public Employees > PERF ASA Only Plan FAQs > How are my PERF benefits taxed? How are my PERF benefits taxed?

Taxation on the benefit payments for the PERF ASA Only plan is as follows:

The decision of how to receive the distribution of your ASA can have significant tax implications, and we urge you to consult with a tax advisor. Customer service representatives can explain options to you, but cannot offer tax advice. The information below is included to aid you and your advisors with federal tax provisions as they apply to PERF benefits.

Any contributions to your ASA made with after-tax dollars are considered “tax basis” because you have already paid taxes on those dollars. Mandatory contributions paid by your employer were not taxed at the time they were paid. Therefore, they do not create “tax basis.” Upon retirement, any after-tax contribution (your tax basis) is reported by PERF as non-taxable on the IRS Form 1099-R issued to retired members and the IRS. However, it is important to note that your tax basis is recoverable under very specific IRS rules.

You can elect to receive a lump sum distribution of your ASA Only. However, the entire tax basis is recovered in total since there is no recurring payment. If it is a partial lump sum and partial annuity, the basis will be split between the two, and the annuity recovery will be based on your age. If you annuitize your ASA Only, the basis allocated to the monthly annuity payment is divided up and recovered over a mandatory number of monthly payments, as determined by applicable IRS regulations. Therefore, a portion of each monthly benefit paid to you is non-taxable, for as long as basis remains.

If contributions are received after the member has requested a final distribution and the total account balance has been paid, the contribution is accepted and another distribution is paid using the previous distribution instructions. If a member was paid a disbursement in error, INPRS will work to restore the money if the member subsequently returns to work.

This division of the basis is required because the IRS has issued a letter ruling to PERF concluding that the ASA and monthly annuity payment payable to you do not constitute separate accounts. The consequence of this ruling is that, upon retirement, basis from contributions to the ASA must be partially allocated to your monthly annuity payment, as we have described above. One exception to this basis allocation rule is also relevant: a special provision of federal tax law permits you to immediately recover any tax basis that you may have had in your ASA on Dec. 31, 1986. The post-1986 basis, however, must be allocated to your monthly annuity payment.

Leave Your ASA Invested: Upon separation from service, you may choose to leave your ASA invested with PERF. However, based on IRS regulations, you must begin distribution at age 70 1/2. Until you elect to receive your funds, they will remain invested according to your directions.

Withdraw Entire ASA: If you decide to withdraw your entire ASA, you must choose a direct rollover, complete withdrawal, or partial rollover to a qualified plan for the Taxable Portion of your ASA. Please consider the tax consequences you may face if you choose a complete withdrawal of the Taxable Portion of your account.

INPRS is required by law to withhold 20 percent for federal income taxes for any part of the eligible rollover distribution that is not directly rolled over. You will have to pay federal and state income taxes on this taxable portion.