Is my entire CalSTRS benefit subject to federal income tax?
When you receive CalSTRS benefits, a portion of the payment may not be subject to federal income tax. Your contributions determine what portion of your benefits is and isn’t subject to federal income tax.
If you made contributions to CalSTRS, and the money used to pay those contributions had already been subject to federal income tax, these contributions and payments are considered “previously taxed contributions,” or post-tax contributions.
The IRS uses two methods to calculate your previously taxed contributions in order to avoid taxing you twice. The two methods are the General Rule and the Simplified Method.
How does the Simplified Method work?
The total of the previously taxed contributions in your account is divided by a set number of monthly payments based on your age (and/or the age of your option beneficiary, if applicable) at the time of retirement. This calculation will result in an annual Total Excludable amount of money that you can recover tax-free. The set number of payments and the calculation formula for the Simplified Method is provided by the IRS. For additional information regarding the Simplified Method, refer to IRS Publication 575, Pension and Annuity Income.
You must use the Simplified Method if your annuity starting date was after November 18, 1996 and both of the following apply:
- Your contributions are from a qualified employee plan, a qualified employee annuity or a tax-sheltered annuity plan (403(b) plan). CalSTRS is a qualified plan.
- On your annuity starting date, at least one of the following is true:
- You are less than age 75.
- You are entitled to less than five years of guaranteed payments.
How does CalSTRS calculate the taxable and non-taxable amounts on my Form 1099-R?
If you meet certain conditions, CalSTRS uses the Simplified Method to determine taxable amounts for tax withholdings. Using this method, if you make post-tax retirement contributions while employed, then a portion of each benefit payment should be excluded from your taxable benefit income for a specific period of time allowed by the IRS.
This non-taxable portion is reported as Nontaxable Contributions (Box 5) on your Form 1099-R.
Do I have to use the non-taxable and taxable amounts provided by CalSTRS on my Form 1099-R when filing my taxes?
CalSTRS must use the methods prescribed by the IRS to determine the taxable amount on your Form 1099-R. However, you might have chosen to use a different IRS-approved exclusion method if certain requirements are met.
For a qualified plan like CalSTRS, you generally cannot use the General Rule unless your annuity starting date was before November 19, 1996 or on the annuity starting date, and if both following conditions are met:
- You are age 75 or older, and
- Your annuity payments are guaranteed for at least five years, regardless of the annuity starting date.
Where can I obtain more information regarding the Simplified Method?
CalSTRS does not provide tax advice. For more information about the IRS Simplified Method, members should: