Many employers offer pensions for savings-minded employees looking to stash away cash for their golden years. Some pension plans are funded by your employer, while others, like a 401(k) plan, allow you to chip in money for your future. Once you retire, you can start making withdrawals, but you'll have to pay federal taxes on the money you take out. Depending on where you live, you may also owe state taxes on your pension benefits.
As of 2013, there are 15 states that consider pension benefits to be fully taxable. This means that any money you get from a pension is treated like income and is subject to ordinary state income tax. States that tax 100 percent of pension benefits include Arizona, California, Indiana and Massachusetts. You'll also have to pay state and federal withholding tax unless you opt out. If you decide to forgo state and federal withholding, you have the option of paying estimated quarterly taxes to ensure you don't end up owing more at tax time.
Pension Benefit Exemptions
While some states tax all of your pension benefits, others allow exemptions up to a certain amount. Depending on the state, you may only be eligible for an exemption once you reach a certain age. For example, Delaware allows you to exempt up to $12,500 in pension income if you're over age 60. Other states that allow for limited exemptions include South Carolina, New York and Colorado. Residents of Mississippi and Pennsylvania can exempt all of their pension benefits, regardless of the amount or their age. In Tennessee and New Hampshire, only dividends and interest are taxable.
Untaxed Pension Benefits
As of 2013, there are seven states that don't tax individual income, including money you receive from any kind of retirement plan. This means you won't have to pay any taxes on your pension benefits, regardless of how much money you receive. The states that don't tax pension or other income at all are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
If you take money out of your pension before you turn 59 1/2, you'll have to pay a 10-percent early-withdrawal penalty on the money no matter which state you live in. Rolling your pension money over into another qualified retirement plan can help you avoid the penalty. Moving to a no-income-tax state means you won't lose any of your pension money, but it doesn't necessarily mean you'll pay less in taxes. The state government still needs to generate revenue, which means you could end up paying more in sales, property or estate tax.
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