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Pensions and Taxes LifeBack Tax
Retirees must pay income tax on pensions and other sources of retirement income, just like any taxpayer. How retirement income is taxed depends on the plan and whether you invested in the retirement plan. Most pensions are defined-benefit plans, which are funded solely by your employer and are fully taxable.
Other pension plans, called defined-contribution plans, allow you to contribute part of your wages to the plan. If you already paid tax on your wages before contributing, those contributions are not taxed again when paid out, so your pension is only partially taxable.
If you choose to receive your pension through monthly payouts, each payment is taxed at the rate for when you receive it. Alternatively, you may opt to take a one-time lump sum distribution and rollover the amount into an IRA plan without owing taxes. However, not rolling over a lump sum will make you liable for income tax on the full amount.
Your pension plan may allow you to receive retirement benefits even before reaching the Social Security retirement age of 66. However, pension payments and other retirement plan distributions received before age 59 1/2 are subject to an extra 10% early withdrawal penalty, on top of any income taxes. As such, your pension benefits will be significantly lower until you reach age 59 1/2.
Estimating your annual tax liability and withholding taxes accordingly are key to not owing back taxesto the IRS at the end of the year. The IRS is very aggressive when chasing unpaid taxes, whether the taxpayer is a young employee or a retired senior citizen. If you owe back taxes on your pensions or other retirement funds, please contact us at LifeBack Tax Relief, and we will be happy to deal with with the IRS for you.
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