Asking for a Friend: Is My Monthly CalPERS or CalSTRS Pension Taxable?

If you’ve worked in California and you’ll soon be collecting a monthly CalPERS or CalSTRS pension (or maybe both if you established reciprocity), you might be wondering: How exactly will your pension be taxed? Will you need to worry about doing your own tax withholding? Do you really have to keep paying federal and state income taxes even though you’re retired?

Federal Taxes: Yes

Both CalPERS and CalSTRS pensions are subject to federal income tax. Your pension will generally treated as ordinary income and be taxed according to your federal tax bracket.

CalPERS and CalSTRS will send you a 1099-R tax form in January showing exactly how much pension income you made last year, and how much of that was taxable.

State Taxes: Depends Where You Live

• If you live in California your CalPERS or CalSTRS pension is taxable at the state level.

• If you live outside California it’ll depend onthe laws of the state you reside in. Some states tax pensions, and others don’t. For example, nearby states Nevada and Washington do not collect state income tax, and therefore don’t tax pension income.

Tax Withholding Options

• Federal: Taxes are calculated and withheld automatically by CalPERS and CalSTRS.

• California: If you live in California, you can have CalPERS and CalSTRS withhold state taxes from your monthly benefit.

• If you live outside California: Neither pension system will withhold state income taxes for other states, and if your state taxes pension income, you’ll need to make sure to pay these taxes yourself to avoid any penalties or interest.

Bottom line:

If you’re collecting a CalPERS or CalSTRS pension, you’ll pay federal income tax. Whether you pay state income taxes depends entirely on where you reside in retirement.

FAQS:

• I receive both CalPERS and CalSTRS pensions due to reciprocity. Are both taxable?

  • Yes. Each pension is taxable under the same rules independently. You'll receive a separate 1099-R from each system and will need to report both on your federal (and, if applicable, state) return.

• I moved from California to a state with no income taxes. Do I still owe California taxes?

  • Generally no. Once you're a full-time resident of another state, California no longer taxes your pension income. However, residency rules can be nuanced. If you split time between states or recently moved, it's worth confirming your residency status with a tax professional.

• What if I don't withhold enough taxes throughout the year?

  • If your total tax withholding falls short of what you owe, you may face an underpayment penalty when you file. To stay ahead of this, you can make estimated quarterly tax payments directly to the IRS and/or your state.

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Disclaimer: This information is for educational purposes only and doesn't constitute financial advice. Consider consulting with a fee-only financial planner for personalized guidance.