Tax Requirements

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This information applies to LACERA retirees who are U.S. citizens or resident aliens (green card holders) and live in the United States.

Taxability of Monthly Retirement Allowances

Under most circumstances, retirement allowances are taxable under both federal and State of California income tax laws.

If you were granted a service-connected disability, withholding tax will be based solely on the portion of your allowance that exceeds 50 percent of your final compensation. Information on the taxability of payments from qualified employer plans (such as LACERA’s) is available in the publication below, your local IRS office, or by calling 800-TAX-FORMS.

  • IRS Publication 575: Pension and Annuity Income

Payment of your income tax is your responsibility. Withholding is one way for you to pay a portion of your tax. If no tax or not enough tax is withheld from your benefits, you may have to pay estimated taxes during the year or pay a tax penalty at the end of the year. For specifics on your personal situation, consult with a professional advisor. LACERA does not offer tax or legal advice.

Federal Tax Withholding

LACERA must withhold federal taxes from your monthly retirement allowance at no less than the applicable default rate if you do not submit a W-4P form or if your W-4P form does not indicate your election to have no federal withholding. Default federal withholding based on the IRS’s new version of the W-4P (redesigned in 2022) is calculated as if you were single and claiming no adjustments.

Note: If your federal withholding is based on a pre-2022 version of the W-4P and the default rate of married and claiming three withholding allowances, LACERA will continue calculating your federal withholding based on that default rate until you submit a new W-4P.

State Tax Withholding: California Residents

LACERA must withhold California state taxes from your monthly retirement allowance at no less than the applicable default rate if you are a California resident and do not submit a DE 4P form indicating your election to have no California state withholding. The current default California state withholding rate is based on if you were married and claiming three withholding allowances.

State Tax Withholding: Non-California Residents

Your LACERA retirement income may be taxable in your state; state tax requirements differ. However, the source tax law protects you from paying state taxes in two states on the same retirement income.

In compliance with federal law, California income tax is not withheld if your primary residence is outside California. If you are receiving other income from California, you may still be subject to state tax. You may not elect to have LACERA withhold taxes from your allowance to satisfy your other California obligations if you do not reside in California.

Information on the taxability of payments from qualified employer plans such as LACERA’s is available in the publication linked below, your local IRS office, or by calling 800-TAX-FORMS.

  • IRS Publication 575: Pension and Annuity Income

Changing Your Tax Withholding

You have the option to change your tax withholding election at any time. For more information, visit the Changing Your Tax Withholding page.

Taxability of Lump-Sum Payments

For lump-sum payments, LACERA must generally withhold 20 percent in federal income tax and an additional two percent in state tax if the recipient resides in California and does not elect to have no state tax withheld. In certain cases, a portion of the benefit may not be taxable; LACERA will notify you of the taxable portion.

In most cases, taxable lump-sum payments are eligible for a tax-deferred rollover to a traditional Individual Retirement Account (IRA) or eligible employer plan. (A rollover is a payment by you or LACERA of your lump-sum benefit payment to an IRA or other plan that allows you to postpone taxation of that benefit until it is paid to you.) However, prior to initiating a rollover, you will need to make sure your IRA or eligible employer plan will accept a rollover from LACERA. Please note that lump-sum payments representing monthly benefit amounts paid to you retroactively are generally not eligible for rollover.

If IRS required minimum distributions (RMDs) apply to a lump-sum payment you are receiving, you will not be eligible to roll over the RMD portion of the payment. Federal regulations require LACERA to exclude RMDs from the rollover amount and issue the RMD in a separate check payable to you rather than to your IRA or eligible employer plan.

  • For more information on rollovers, see this Special Tax Notice.

Garnishment

A member’s retirement allowance is generally not subject to garnishment or other levies except to satisfy a judgment for spousal or child support or a division of community property, or a tax levy by the IRS or the California Franchise Tax Board for payment of delinquent federal or state income tax.

Tax Reporting

In January, LACERA will send you a copy of the Form 1099-R it submits to the IRS. The form indicates the taxable amount of the benefit paid to you in the previous year and the amount of taxes withheld. Copies of your 1099-R are also available on My LACERA.

Information on the taxability of payments from qualified employer plans such as LACERA’s is available in the publications linked below, your local IRS office, or by calling 800-TAX-FORMS.

  • Special Tax Notice
  • IRS Publication 575: Pension and Annuity Income
  • IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)
  • IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)

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