You can receive a retirement pension payout after you cease working; however, is it considered income?
This is a common question we get asked about pensions. You’ll experience numerous changes to your financial situation, and there’s plenty to know. How the government categorizes the pension benefits is among the most important.
The quick answer is: if your pension were paid for with pre-tax dollars, It would most likely be considered income for tax purposes once you receive the money. The majority of pensions fall into this class.
What Is A Retirement Pension?
Retirement pensions are a type of plan that an employer offers. It typically pays out in fixed installments after you reach retirement age. The employer funds pensions and the amount paid is determined by aspects like years of employment or salary and your retirement age.
A pension is distinct from the 401(k). The 401(k) savings plan happens when an employee contributes to the account. Employers may match those contributions. The payouts from a 401(k) will depend upon the success of investment choices selected by the plan.
Employers assume the investment risk in a pension plan, and payouts are fixed. Some employers let employees contribute to their pension. Pensions are becoming less common, particularly for public companies; however, they still exist. They are more prevalent in the public sector, such as government and education.
Can A Retirement Pension Be Considered Income?
In most instances, it is the IRS will consider an income from retirement pensions to be tax-deductible. This means that you have to have to pay income tax. After retirement, you will receive the tax form 1099, which will reveal how much of your pension is tax-deductible as income.
Generally, if the contributions to your pension are pre-tax dollars, they are considered income when paid out at retirement. The exact tax rate you must pay will be contingent on your tax bracket for that year. If you opt for a lump sum payment, the income tax is likely to be all due during the tax year.
Some states do not consider pension payments taxable income for state income taxes. It is best to research the laws of your condition.
Are There Any Exceptions?
There are some exceptions where the retirement pension isn’t considered income for tax purposes.
- Certain military or government pensions are income tax-free or are only partially taxed when retirement occurs due to disability.
- If you have contributed to your pension plan with tax-free money, that money won’t be considered income.
- Pension payments are not counted against social security benefits as income since you do not have to pay taxes for social security on these payments.
Suppose you are unsure about your retirement earnings. In that case, you can consult us as a tax advisor, and they will be able to help you understand the specifics of your circumstance.