Taxation of Pensions in the US


People are more enthusiastic to do work and make their name when they are young. With the passage of time, they grow weak and their capabilities also get worn out. Therefore, they abandon their jobs and announce retirement so that they spend rest of their lives with their family and friends in peace. Retirement is the act in which a person abandons their job and ceases their work. A retired person gets pension that they contribute throughout their service time, so that they get it back when they are feeble and are not able to work anymore. Before signing the agreement, with the management of the company or organization, which the person joins, the matters related with retirement and pension are discussed.

Pension plan is the schedule of turning the salary of employee into pension, when they are not in-service anymore. Like the service salary, one has to pay tax for their pension all over the world, but taxation of pensions in the US is a bit different from rest of the world. There are different retirement plans offered to the employees by the US government. These plans include; defined contribution plan, defined benefit plan, the hybrid and cash balance, qualified retirement plans, simple individual retirement account, the IRA, non qualified plans, SEP individual retirement accounts or IRAs, and Keogh or HR10 Plans etcetera. Thus, before getting retirement, one should gain the knowledge about the taxation of pensions in the US.

There are different rules and clauses related with the taxation of pensions in the US for different sorts of cases of pensions, such as, if one contributes their salary for pension after paying tax from it, the pension they receive afterward will be partial taxable. Partial taxable pensions fall under the category of general rule or simplified method of taxation. The general rule is the rule under which one figures their taxable and tax free portions of their annuity payments by using some life expectancy tables that are prescribed by the IRS. People whose annuity began before or on November 1996 should follow this general rule. According to IRS, the internal revenue service, if one starts receiving their annuity after 18th November 1996, from a qualified retirement plan, one uses the simplified method to figure the parts of their payments which are tax free.

But the EGTRRA, economic growth and tax relief reconciliation act has brought some changes to the retirement and pension plans of US, in 2001, thus making it easier for the employees to manage their plans. Talking of the taxation of pensions in the US, qualified retirement plan can also be regarded as the qualified employee annuity, qualified employee plan or tax sheltered annuity plan. If you wish to figure the taxable and tax free parts of your retirement payments, under the simplified method, you may use the simplified method worksheet. Thus, it is recommended that before announcing your retirement, you must be fully aware of the taxation of pensions in the US by consulting various law books.

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