Note: The below is not a complete discussion of tax law in this area. Specific situations may apply. Contact a tax advisor for additional detail.
Generally, all payments from SERS are subject to federal income tax except those considered by the IRS to be a return of Member Contributions made prior to January 1, 1982, or contributions made to purchase creditable service after the service was rendered.
If you are a member of one of the pre-Act 120 Classes, you may choose to roll over all or part of the taxable portion of your lump sum Option 4 payment or lump sum withdrawal of your Accumulated Deductions into a traditional Individual Retirement Account (IRA) or another eligible plan. Rollovers allow you to delay paying federal income taxes on the lump sum payment until you withdraw the money from the IRA or other qualified plan. This allows you to receive the money at a time when your tax liability may be lower. You may also choose to roll over your Option 4 payment to a Roth IRA, however, SERS suggests that you contact a financial adviser or other qualified person prior to electing such a rollover due to the tax consequences that differ from a traditional IRA.
If you choose to take a distribution of the lump sum payment instead of a rollover, federal tax law requires SERS to withhold 20 percent of the taxable portion.
In addition, if you do not elect to roll over your taxable monies and you do not attain age 55 (or 50 for qualified public safety employees as defined by the IRS) by the end of the year in which you terminate employment, you will be subject to a 10 percent federal excise tax. The 10 percent excise tax is in addition to the regular rate of federal income tax. There will be no excise tax or other current taxation if you roll over the taxable portion to an IRA or other eligible plan. However, if you terminate employment before age 55 (or 50 for qualified public safety employees as defined by the IRS) and you elect a rollover of the lump sum payment and then withdraw those monies before attaining age 59½, you may be subject to the 10 percent excise tax.
You can choose a direct or indirect rollover.
In a direct rollover, SERS sends the monies directly to your IRA or other eligible plan. The money will be tax-deferred as long as it remains in the IRA or other eligible plan.
If you take a distribution of the lump sum payment rather than electing a direct rollover, you still will be eligible for an indirect rollover if you invest it in a qualified plan within 60 days of receipt of the monies. If you are under 55 (or 50 for qualified public safety employees as defined by the IRS), the advantage of a rollover is that you will avoid the additional 10 percent federal excise tax penalty, and you may recover the 20 percent SERS withheld for federal taxes when you file your federal income tax return.
SERS will not advise you as to the company or financial institution to which you should roll your money. SERS urges you to seek the advice of a professional tax advisor or financial planner. Please inform your financial advisors, attorneys or other representatives that, due to privacy issues, we cannot speak to them regarding your benefit without your written authorization to do so. Without such authorization, SERS will provide this information only to you.
If you decide that a rollover is right for you, the following information will be helpful:
SERS is a Governmental Plan under Section 414(d) of the Internal Revenue Code, and is treated as a qualified plan under Section 401(a) of the Internal Revenue Code.
Check with the administrator of the plan you have chosen for the rollover to be sure it is a qualified plan. If you choose an unqualified plan, you could be subject to tax penalties.
Complete an Authorization for Direct Rollover of Taxable Payment (SERS-254) form, available from your Retirement Counselor and on the SERS website.
Only the taxable portion of your lump sum payment is eligible for a rollover to a traditional IRA, however all of your lump sum may be rolled to a Roth IRA. Please seek the advice of a professional tax advisor if you are considering rolling to a Roth IRA.
Monthly Annuity payments from SERS are not eligible for a rollover.
All interest is taxable.
Regular Member Contributions made after January 1, 1982 are taxable.
Contributions for service purchases may not be taxable.
If you choose to roll over part of the lump sum payment, the portion distributed to you will be subject to federal income tax in the year you receive payment.
If you return to State service after rolling your funds into an eligible plan, you can roll those funds back into SERS (as long as the funds were not commingled with other funds within the eligible plan).
If you are age 70 ½ or older in the year your rollover is paid, you may not be permitted to roll over a portion of your lump sum due to the Internal Revenue Service rules on Required Minimum Distributions.
IRS Form 1099-R
No matter which option you choose when you retire, each January SERS will send you an IRS Form 1099-R. For most retirees, this statement will show the taxable portion of gross retirement income for the previous year. The form is to be used in filing your federal income tax return. Depending on the retirement option selected and, if permitted, possible transfer of your money to an IRA or other qualified plan, you may receive several different Form 1099-Rs.
You might be required to file a copy of each form with your federal income tax return and your State and local income tax return.
The Retirement Code provides that no Pennsylvania State or local taxes are payable on any payments received from SERS for Annuitants residing within the Commonwealth of Pennsylvania. SERS does not furnish copies of Form 1099-R to any State or local tax agency in Pennsylvania. If you live in another state, you may be subject to state and local income taxes in that state. If you live in another state, contact your state and local revenue office or a qualified tax advisor for information on whether you owe state and local taxes on your SERS Annuity. If you are permanently living outside the United States, you should be familiar with any income tax obligations you may have to non-United States taxing authorities.
In addition to retirees, members not eligible for a retirement benefit who terminate employment and withdraw their Accumulated Deductions will receive a 1099-R that shows the taxable portion of the withdrawn Accumulated Deductions.
Duplicates of Form 1099-R
You can print copies of your forms from your personal SERS Online Member Services account, accessible through the SERS website or you can request duplicates by writing to the SERS Disbursements Section, 30 N 3rd St, Suite 150, Harrisburg, PA 17101-1716. Duplicate forms for tax years 1995 to the present are available free of charge, while forms for tax years 1994 and earlier are available at a cost of $5 each. When writing to SERS, include your name, Social Security number, current address and daytime telephone number. Indicate the tax years for which you are requesting a duplicate form and enclose a check or money order in the correct amount made payable to the State Employees’ Retirement System.
Contact a Retirement Counselor at 1-800-633-5461 to obtain general information about taxes on your retirement payments. We also suggest that you contact the IRS or a professional tax consultant to request tax advice when planning for retirement. For answers to specific questions about federal estate taxes on a Death Benefit that may be payable to you or your Beneficiaries, contact the IRS or a professional tax advisor.
See IRS Publication 575, Pension and Annuity Income at www.irs.gov, for further information on calculating the federal income tax on your SERS Annuity.