Different kinds of retirement accounts are treated diversely for tax purposes. Withdrawals from some accounts are tax free as long as you wait until you meet a minimum age requirement before you withdraw funds. With other accounts, your contributions may be tax-sheltered, but you must pay taxes on your withdrawals. The Internal Revenue Code is clear about the taxability of contributions to and withdrawals from a Public Employees Retirement System account.
A PERS account is a qualified plan, according to IRS regulations. A qualified plan meets Internal Revenue Code requirements for retirement accounts. The requirements include participation restrictions, deferral limitations and vesting requirements. Plans that comply with these requirements receive favorable tax treatment as qualified plans.
For the most part, contributions to a PERS account occur on pretax income. The amount you contribute to your PERS account is deducted from your gross wages and then the balance of your wages incurs the tax. Because PERS contributions occur pretax in the first place, you cannot take another deduction for them on your tax return.
If your PERS-covered employment ends before you reach retirement age, the state may refund the contributions you made to the plan. In California, for example, you may take a refund of the amount you contributed to the plan along with earnings on those contributions. A CalPERS refund is taxable, and the state will withhold taxes from your CalPERS refund unless you elect to roll the funds over into another qualified plan, such as an Individual Retirement Account. Each state administers its own PERS plan; refund regulations may vary in the state that administers your account.
Some state employees are eligible for enhanced PERS benefits because of the nature of their jobs. In New Jersey, for instance, law enforcement officers, including police and fire department employees, may enroll in a PERS LEO plan. Most New Jersey law enforcement officers must retire at age 65. The PERS LEO plan helps make up for the fact that a law enforcement officer cannot continue to contribute to PERS after reaching the compulsory retirement age.
Certain contributions you make to qualified plans may be tax deductible. For instance, if you earn self-employment income, you may be entitled to deduct contributions to a self-employed plan, SIMPLE or qualified plan from your gross income.
Your individual circumstances and your state's PERS regulations affect the income you must include and the deductions you are entitled to take on your tax return. A Certified Public Accountant can help you understand how the tax code applies to your particular situation.