As we flip our calendars to 2015, we’re all thinking about what lies ahead, New Year’s resolutions, and much more. One thing we may not be thinking about is taxes. For one reason or another, we sometimes forget about taxes until April. You may be thinking, “I’m retired (retiring) and my taxes won’t be a big deal, so, I won’t worry about it until April.” Don’t just count on your taxes being lower without some tax planning with a qualified tax professional or CPA. Let’s discuss the taxation of your LAGERS benefit and how it may affect your taxable income.
Is my benefit subject to Federal income tax?
Yes. However, if an employee was required to contribute 4% of their compensation while employed, those contributions have already been taxed. Once the member begins receiving a monthly benefit, a portion of the benefit will not be taxable.
Is my benefit subject to Missouri income tax?
Depending on your adjusted gross income, your public pension benefits may be up to 100% exempt from Missouri state income tax. Married couples with an adjusted gross income of less than $100,000 and single individuals with an adjusted gross income of less than $85,000, will qualify for their public pension income to be 100% tax exempt, limited to $36,442 for each spouse. If your income exceeds the limit, you may qualify for a partial exemption. To learn more visit www.dor.mo.gov or contact a qualified tax professional.
Will LAGERS withhold taxes from my monthly benefit?
Yes. If you choose, LAGERS will withhold Federal and /or State of Missouri income taxes. You can have LAGERS withhold a specified dollar amount, apply the tax tables based on the income you are receiving from LAGERS, or apply the tax tables with an additional dollar amount withheld. You can change your tax withholding at any time throughout retirement. Also, if you move out of state, notify LAGERS to stop withholding State of Missouri income taxes (if applicable).
Will LAGERS produce tax documentation I can use to file my taxes?
LAGERS will send you a 1099-R by January 31st of every year. The 1099-R illustrates the taxable income that you received from LAGERS, the amount of taxes withheld from your benefit, and much more. You also can access these documents on the myLAGERS portal.
I am going to receive a Partial Lump Sum (PLUS). How are taxes applied to the Partial Lump Sum?
Taxation of the Partial Lump Sum depends on how you decide receive the money. If you elect to receive the benefit directly, the Partial Lump Sum (PLUS) is fully taxable and LAGERS has been instructed to forward 20% of the PLUS to the IRS. The 20% withholding will not include any State of Missouri income taxes and depending on your income level, your tax liability may be more or less when you file your taxes. Also, general employees younger than 55 and public safety employees (Police / Fire) younger than 50 who receive the partial lump sum will be subject to a 10% early distribution penalty. This penalty will be assessed when you file your taxes.
By the sound of the above paragraph, you may be thinking you shouldn’t take the Partial Lump Sum because of all the taxation and / or penalties. However, you can delay the taxation and potentially avoid the penalties by doing a direct rollover of the PLUS into a qualified retirement account (401k, 457b, IRA). By having the PLUS directly rolled over, the lump sum takes the characteristics of the account where the money is being deposited and 20% is not withheld for the IRS. Instead, the money will be taxed when you withdraw it from the qualified retirement account. Keep in mind, if you withdraw any amount of the Partial Lump Sum from the qualified retirement account before the above early distribution guidelines (General younger than 55, Public Safety younger than 50), you will still be assessed the 10% early distribution penalty.
As you can tell there is a substantial amount of information about the taxation of you LAGERS benefit! On top of that, this blog does not include any of the other variety of taxable events that can occur with your other retirement accounts and / or other retirement income. So, as I said in the beginning, a little planning and discussion with a qualified tax professional about your taxation in retirement can go a long way.