Taxes on Your Retirement Benefits - PSERs

Public School Employees’ Retirement System
Let’s Talk About
<strong>Taxes</strong> 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
<strong>Taxes</strong> 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

<strong>Taxes</strong> 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 Application
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 retirement
contributions deducted from your
paycheck after December 31, 1982,
(excludes purchase of service installment
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 contributions
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. <strong>Taxes</strong> 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 contributions
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 password.
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 Miscellaneous
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 Investment
in Contract as a partial lumpsum
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

emainder 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 Investment
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 expected
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 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. After
you have recovered the total amount
of your Investment in Contract, any
subsequent monthly annuity payments
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 lumpsum
(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 Retirement
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 Authorization
for Direct Rollover (Refund)
form (PSRS-1243) with either the
Application for Refund (PSRS-59),
or the Application for Refund - Installments
(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 authorization
form.
• Non-Direct Rollovers
You may choose to have the lumpsum
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 distributions
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 Pennsylvania
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 “Contacting
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 <strong>Taxes</strong>
Monthly retirement benefit payments
from PSERS are exempt from Pennsylvania
state and local taxes.
17

Other States’ <strong>Taxes</strong>
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 indicate
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 <strong>Taxes</strong>
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.
21
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 depending
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.

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 monthly
retirement benefit payments)
A
G
A payment that may qualify for 10-year
averaging.
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 Investment
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, except
on major holidays.
Harrisburg Headquarters
5 North 5 th 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