Tax Liability on WRS Benefits
ET-4125, Rev. 05/2006
This booklet provides general information about the income tax
liability on your Wisconsin Retirement System (WRS) benefits. The
tax treatment of WRS benefits is generally similar for federal and
Wisconsin income tax purposes. There are a few exceptions such as
retirement payments received by certain beneficiaries and teachers
which are exempt for Wisconsin income tax purposes but not for federal
purposes. See Payments Exempt from Wisconsin Income Tax, page 5.
If you are not a resident of Wisconsin, you are not required to
pay Wisconsin income tax. You should check with the tax department
in the state where you reside for information on your state tax
liability with them.
Investment in Contract (IIC)
The amount of your WRS benefit which is non-taxable is based on
your “Investment in Contract” (IIC). The Internal Revenue
Service (IRS) refers to your IIC as your “cost in the plan.”
Your IIC is the portion of your retirement account that was actually
paid by you from after-tax dollars, generally through payroll deductions;
the rest of your account consists of accrued interest and contributions
paid by your employer(s). If you have made regular additional contributions,
your IIC is calculated separately for your additional account. If
you have made tax-deferred additional contributions (employees of
certain educational organizations only), there is no IIC for those
contributions because tax-deferred contributions are always fully
taxable when a benefit is paid.
Your IIC for your required contributions is provided at the bottom
of the “Employee Required Contributions” section on
your annual Statement of Benefits.
Lump Sum Benefits
The amount of your benefit in excess of your IIC is fully taxable
when paid. Under federal law, if you do not directly roll over the
taxable portion of your lump sum payment into an eligible employer
plan or a traditional Individual Retirement Account/Annuity (IRA),
the Department must withhold 20% of the taxable portion of your
payment as federal income tax.
IIC contributions may also be rolled over (except not to Sec. 457
governmental deferred compensation plans) if the receiving plan
is prepared to account for these contributions separately. Consult
your tax advisor for information.
EARLY DISTRIBUTION TAX: In addition to federal
and state income taxes, there is also an additional 10% federal
tax on the taxable portion of any lump sum payment made to you before
you reach age 59½ *. You should contact your tax consultant
or the IRS for in-formation about other exemptions from this tax,
such as for death benefits, payments made pursuant to a Qualified
Domestic Relations Order, or withdrawals due to total and permanent
disability.
This additional tax will not be deducted from your payment; you
should contact your tax consultant or the IRS for reporting information.
A 1099-R form which shows the amount of income tax withheld (if
applicable) and the taxable and non-taxable portions of your benefit
will be enclosed with your check.
Keep your copy of the 1099-R; you will need it
when you file your income tax returns for the year in which the
check is issued.
For information about time limits, restrictions, etc., which could
affect your rollover eligibility or information about capital gains
treatment or the 10-year tax option, contact your tax consultant
or your nearest IRS office.
*In some instances, this may not apply if you terminated covered
employment in the year you reached age 55 or later.
Monthly Annuities
The amount of your monthly annuity in excess of your IIC will be
subject to tax in the year it is paid to you. This Department will
calculate the taxable amount for you.
For further information about how annuities are taxed, refer to
IRS Publication 575. For further assistance, contact the Internal
Revenue Service or the Wisconsin Department of Revenue.
When you apply for your annuity, be sure to complete the income
tax withholding information on the form provided. It is possible
that your withholding election will result in no tax being withheld,
depending on the taxable amount of your benefit and the withholding
election that you make. If you do not specify how you want taxes
withheld, federal regulations require us to withhold according to
the tax tables assuming you are married with three exemptions.
Wisconsin law does not require that state income tax be withheld
from your monthly annuity. However, you may request that Wisconsin
income tax be withheld.
We cannot withhold state taxes for any other state than Wisconsin.
If you do not have Wisconsin income tax withheld and you are a
resident of Wisconsin, you may be required to make estimated tax
payments. Generally, if you would have to pay $200 or more with
your income tax return, you must prepay your tax each year by making
estimated tax payments. Estimated tax payments are made by filing
an Estimated Tax Voucher, Form 1-ES. Failure to make required estimated
tax payments may result in interest being assessed on the underpayment
amount. You can obtain further information and Form 1-ES from
any Department of Revenue office.
NOTE: If you receive payments from an annuity
certain of less than ten years from your additional contributions,
federal law requires your total tax withholding to equal at least
20% of the taxable portion of your annuity certain payments, unless
you directly roll over the taxable portion of your payments into
an eligible employer plan or a traditional Individual Retirement
Account (IRA). However, if you begin an annuity certain of less
than ten years in the year in which you reach age 70½ or
later, a portion of your benefit is a required minimum distribution
under federal law. Federal withholding is voluntary on the required
minimum distribution amount; the mandatory 20% withholding applies
only to the portion of your benefit in excess of that amount. The
required minimum distribution amount cannot be rolled over. If you
have made additional contributions and take an annuity certain prior
to age 59½, there may also be a 10% federal early distribution
tax on the taxable portion of those monthly payments paid to you
before you reach age 59½.
You can change your withholding election at any time by requesting
and completing an Income Tax Withholding Election form (ET-4310)
or by calling our toll-free self-service line at 1-877-383-1888
or (608) 266-2323 (local Madison). Allow at least six weeks after
we receive your election for the change to be reflected in your
monthly payments.
In January of each year, an annuitant 1099-R form for the prior
year is mailed to your home address. (You must notify us promptly
of any changes in your home address.) The 1099-R includes information
such as the total and taxable amounts of your annuity for the past
year, your original IIC, the amounts of federal and state tax withheld,
insurance premiums deducted, etc. A copy of this form must be filed
with your tax returns for the prior year.
If you have multiple WRS annuity records, for example, you receive
an annuity from your own WRS account and as a beneficiary of another
account, you will receive a separate annual 1099-R tax statement
for each of your annuity accounts. These will be mailed in separate
envelopes and may arrive on separate days. It is important that
you file copies of all your 1099-R forms with your annual tax returns.
If you receive a disability annuity, contact your tax consultant
or your nearest IRS office for information about possible special
tax treatment of your disability annuity.
Minimum Distribution Requirements
If you have an inactive account with the WRS, federal law and Wisconsin
statutes require you to receive a minimum distribution amount each
year beginning with the year in which you reach age 70½.
If you do not apply for your WRS benefit on a timely basis, we
are required by law to begin an automatic distribution of your WRS
account to you.
Wisconsin statutes limit the optional forms of payment in which
you can receive your WRS contributions; this could affect when your
benefit must begin to meet the minimum distribution requirement.
If you will be terminated from covered WRS employment in your 70½
year, you should request WRS annuity estimates up to one year in
advance and begin your benefit during that year. For further information
about meeting the federal minimum distribution requirement, contact
the IRS or your tax consultant.
Rollovers
You are generally eligible to roll over WRS payments paid as lump
sum distributions or as an annuity certain paid for a period of
less than ten years (see Exception below). Federal law requires
the Department to withhold 20% of the taxable portion of lump sum
payments and monthly payments from annuities certain of less than
ten years, unless you directly roll over these payments into an
eligible employer plan or a traditional Individual Retirement Account
(IRA).
EXCEPTION: Lump sum benefits of less than $200
cannot be rolled over and the 20% mandatory withholding does not
apply. Also, if you take a lump sum benefit or begin an annuity
certain of less than ten years (from additional contributions only)
in the year in which you reach age 70½ or later, a portion
of your benefit is a required minimum distribution under federal
law. Federal tax withholding is voluntary on the required minimum
distribution amount; the mandatory 20% withholding applies only
to the portion of your benefit in excess of that amount. The required
minimum distribution amount cannot be rolled over.
Required and regular additional and tax-deferred additional contributions
can be rolled over into traditional IRAs, Sec. 403(b) tax sheltered
annuity plans, Sec. 457(b) governmental deferred compensation plans,
or another eligible employer plan. You can request that part or
all of your payment(s) be directly rolled over; however, we must
withhold the 20% from any taxable portion that is not directly rolled
over. With a direct rollover the WRS issues a check payable directly
to the other plan or IRA. To request a direct rollover you must
submit an Authorization for Direct Rollover form (ET-7355) to the
Department with your application for benefits. This form is available
from the Department of Employee Trust Funds. If you request a direct
rollover, the check for any portion not being directly rolled over
will be issued payable directly to you.
If you do not request a direct rollover, any payment will be issued
payable to you. Your payment will be taxable in the year in which
it is issued unless you roll it over into an eligible employer plan
or IRA within 60 days. However, the Department must still withhold
20% of the taxable portion of your benefit. If the taxable amount
exceeds the amount you receive after the 20% is withheld and you
wish to roll over the full taxable amount, you must obtain the remainder
from other sources.
Whether a payment is issued directly to you or you elect a direct
rollover, all payments will be mailed to your address. If you wish
to roll over your payment, you are responsible for transmitting
it to the receiving financial institution.
Death Benefits
If you are applying for a death benefit from the account of a deceased
participant and some benefits have already been paid from that account,
credit for part or all of the IIC will already have been used. The
non-taxable portion of the death benefit, if any, will be based
on several factors: the original IIC; the benefits already paid
from the account; and, if the deceased participant was an annuitant,
the begin date of the original annuity and the option selected.
If you receive a death benefit as a lump sum or from an annuity
certain of less than ten years (additional contributions only),
and were not the spouse of the deceased on the date of death, the
mandatory 20% withholding does not apply to you and you are not
eligible to roll over the taxable portion of your payment(s).
A spouse beneficiary is eligible to roll WRS lump sum death benefits
into his or her existing retirement account, such as a traditional
IRA, Sec. 403(b) tax sheltered annuity, Sec. 457(b) governmental
deferred compensation plan or other eligible employer plan. If a
spouse beneficiary has an existing WRS account, he or she cannot
currently roll the death benefit into this account. Consult your
tax advisor for information.
Only a portion of a death benefit is subject to federal estate
tax. For information about the 10-year tax option, estate tax, or
capital gains treatment on lump sum death benefits, contact your
tax consultant or your nearest IRS office.
Federal distribution requirements are included with a death benefit
application sent to a beneficiary.
Payments Exempt From Wisconsin Income Tax
Some payments received from the WRS are exempt for Wisconsin tax
purposes (they are not exempt for federal tax purposes):
- Payments received by a beneficiary of a deceased employee who
died on or before December 31, 1967.
- Payments received from the Wisconsin Retirement System if the
payments were paid on the account of a person who was a member
of the State Teachers Retirement System or the Milwaukee Teachers
Retirement Fund as of December 31, 1963, or was retired from one
of those retirement systems as of that date. This exemption also
applies to a beneficiary of a person who was a member of one of
those systems as of December 31, 1963, or was retired as of that
date, and to an alternate payee under a Qualified Domestic Relations
Order if the former spouse qualified for the exemption.
CAUTION:
- Only payments from accounts established before 1964 qualify
for the exemption. For example, you were a member of the State
Teachers Retirement System as of December 31, 1963, you left teaching
after 1963 and withdrew the allowable contributions from your
retirement account, completely closing the account. This withdrawal
qualifies for the exemption. If you later return to teaching,
a new account would be established for you in the retirement system.
Any retirement benefits from the new account established after
1963 would not qualify for the exemption.
- Participants in the Wisconsin Retirement System may make voluntary
contributions to their retirement accounts in the form of “regular
additional contributions” or “tax-deferred (tax-sheltered)
additional contributions.” If you qualify for the exemptions
described in 2. on page 5, any additional payment you receive
as the result of having made “regular additional contributions”
is also exempt from Wisconsin income tax. However, any payment
you receive as the result of having made “tax-deferred (tax-sheltered)
additional contributions” is subject to Wisconsin income
tax.
- If payments received from the Wisconsin Retirement System are
based on participation in two or more different retirement funds
(for example, participation in the State Teachers Retirement System
and in the Wisconsin Retirement Fund), the entire payment may
not be exempt. See the instructions for your Wisconsin income
tax form for further information.
The information in this publication on Wisconsin tax liability
reflects the interpretations by the Wisconsin Department of Revenue.
Laws enacted after this date, new administrative rules, and court
decisions may change the interpretations in this publication.
Great effort has been made to ensure that the information in
this circular is accurate. However, if there is any conflict between
the information and the law, the law must be followed.
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