How are my PERF benefits taxed?
Your pension benefit is taxable as ordinary income.
Your Annuity Savings Account (ASA) is taxed according to the option you choose. Taxation for receiving an ASA under the PERF Hybrid plan is as follows:
Choice Number 1 – If you combine your ASA with your lifetime pension benefit, any non-taxable basis you have will be recovered on a pro-rata basis over a predetermined number of payments based on your age at the time benefits start. The balance of each benefit payment will be fully taxable. Unless you elect otherwise on your federal tax withholding form, PERF is required to withhold in accordance with IRS guidelines.
Choice Number 2a – If you withdraw your ASA and have it paid as a lump sum distribution, PERF is required to withhold 20 percent of the taxable portion. The taxable portion of the Annuity Savings Account consists of:
- all 3 percent contributions paid by the employer; and
- all earnings.
You will have to pay state and federal income tax on this taxable portion.
Choice Number 3a – If you withdraw your ASA and elect to have the entire amount directly rolled into an Individual Retirement Account (IRA) or a qualified retirement plan, the taxable portion of your payment will not be taxed in the current year and no income tax will be withheld. You will be taxed later when you receive a distribution from the IRA or qualified retirement plan you rolled your money into.
Choice Number 3b – If you withdraw your ASA and elect to have the 1986 Tax Basis (non-taxable) directly paid to you and the remaining ASA directly rolled into an Individual Retirement Account (IRA) or a qualified retirement plan:
- The “basis” that existed on Dec. 31, 1986, will be paid to you in a lump sum and will be tax-free.
- The taxable portion of your remaining payment will not be taxed in the current year and no income tax will be withheld. You will be taxed later when you receive a distribution from the IRA or qualified retirement plan you rolled your money into.
Choice Number 3c – If you withdraw your ASA and elect to have a portion of the ASA paid to you directly and a portion directly rolled into an Individual Retirement Account (IRA) or a qualified retirement plan (the partial rollover must be in the amount of at least $500), the taxable portion of the part of the distribution that is directly rolled over will not be taxed in the current year and no income tax will be withheld. You will be taxed later when you receive a distribution from the IRA or qualified retirement plan you rolled your money into.
For the portion of your ASA you elect to take in a lump sum distribution, PERF is required by law to withhold 20 percent for federal income taxes. You will have to pay federal and state income taxes on the taxable portion.
Choice Number 4 – Withdraw 1986 Tax Basis (non-taxable) portion of ASA and combine taxable portion with pension benefit. The income tax consequences will be determined as follows:
- The “basis” that existed on Dec. 31, 1986, will be paid to you in a lump sum and will be tax-free. Any “basis” after Dec. 31, 1986, will be recovered on a pro-rata basis over a pre-determined number of payments based on your age at the time benefits start.
- The remaining amount in your ASA will be annuitized and paid with your monthly pension benefit. These payments will be fully taxable in the year received, except for any additional basis recovery you are owed.
Tax Penalty – Early Withdrawal of Annuity Savings Account
You may be subject to an additional 10 percent federal tax penalty on your Annuity Savings Account distribution if you have not reached the age of 59 ½ at the time of your separation from employment.
A number of exceptions to this additional 10 percent tax are available, including, but not limited to, the following:
- payments on your death,
- payments due to disability,
- payments made to an employee who has attained age 55, then separated from service, and who satisfied the requirements for early retirement (15 years of creditable service).
If you separate from employment prior to age 55, you may be able to avoid the additional 10 percent tax penalty if you select a retirement option which would provide payments to you in substantially equal amounts. Based on the IRS guidelines, PERF believes the following options would satisfy this requirement:
- Option 10 (Normal Retirement)
- Option 20 (No Guarantee)
- Option 30 (Joint and Full Survivor Benefits)
- Option 61 (Integration with Social Security)
- Option 71 (Cash Refund Annuity)
You should consult the IRS or your professional tax advisor if you need further information regarding the taxes on benefit payments. It is your responsibility to maintain a benefit payment record for tax purposes.
