Most pension payments are taxable, and the amount of tax withheld depends on your total income for the year and the income tax withholding election you make.
Retirees’ monthly retirement benefit payments are treated as ordinary income. Unless you specify the income tax withholding election you want applied to your benefit, federal and/or California state income tax will be withheld from your benefit payment as the default filing status defined in the tax form instructions. The default income tax withheld is based on the rate of a single person with no adjustments.
Active members’ payments are taxed using the same tax rules that apply to a service retirement pre-retirement for Option 2W, 1957 Survivor Benefit, 1959 Survivor Benefit, and Alternate Death Benefit.
Only a portion of each is taxable, with the exception of the 1959 Survivor Benefit, which is fully taxable and may be subject to a mandatory 20% federal withholding if the allowance is paid to a spouse for less than 10 years. The benefit can be rolled over to an individual retirement account (IRA) to avoid federal income tax withholding in the year the allowance is issued.
A one-time lump-sum benefit may be taxed differently. Unless you choose no withholding, a lump-sum benefit that is not an eligible rollover distribution, the taxation is 10% of the distribution.
A mandatory 20% federal tax withholding rate is applied to certain lump-sum paid benefits, such as the Basic Death Benefit, Retired Death Benefit, Option 1 balance, and Temporary Annuity balance.
Certain lump-sum benefits are eligible to be rolled over to an IRA to avoid the 20% federal tax withholding. Spouses can roll over to a traditional IRA or to an inherited IRA. Non-spouse beneficiaries cannot roll over to an inherited IRA but may be eligible for traditional IRAs.
If you receive a benefit, we will provide you with a 1099-R tax form by the end of January that lists the amount you were paid in the previous tax year. You are responsible for reporting the benefit to the IRS with your personal income taxes. You can access and download your tax statements online by logging in to your myCalPERS account.
For more information on understanding your 1099-R tax form or changing your income tax withholding election, visit Taxes on our website.
Want to Make Tax Time Easier?
Switch to paperless tax forms. Go paperless by December 31 to get your 1099-R by early January. You may choose to receive your tax form by electronic distribution only, no longer receiving a paper tax form distributed by mail. You can also access and download your tax statements online by logging in to your myCalPERS account. To switch to paperless:
- Log in to your myCalPERS account.
- From the My Account drop-down menu, select Mailing Preferences.
- Switch to Online, then click Save.
Nothing contained herein or in this article is intended to constitute financial advice. The statements in this article are general. The Retirement and Tax Law are complex and subject to change. If there is a conflict between the law and this article, any decisions will be based on the law and not this article.