Tax Basis Recovery FAQs

Unlike retirement savings plans such as a 401(k), your Annuity Savings Account is treated differently because it is part of your defined benefit pension plan. This difference is required by the IRS.

1. WHAT IS A TAX BASIS?

The tax basis is the portion of your ASA contribution that was taxed at the time it was paid into your account. Your ASA tax basis is treated differently than a defined contribution benefit.Unlike a 401(k), which is a defined contribution plan, your ASA is treated differently because it is part of a defined benefit.When you retire, INPRS reports your post-tax (tax basis) contribution to the Internal Revenue Service (IRS) as non-taxable. But not all of your basis is recovered at once. Recovery will occur over a period of years until all of your basis is recovered. Your employer also makes contributions to your ASA. The employer’s contribution is not taxed and is not considered tax basis. You may recover your tax basis under certain IRS rules found in IRS publication 575.

2. HOW DOES A LUMP SUM PAYMENT AT RETIREMENT AFFECT MY TAXES?

  1. PRE-1987: Post-tax contributions to your ASA that were made prior to Dec. 31, 1986 are 100 percent non-taxable. A special private letter ruling by the IRS allows you to receive the post-tax contributions made to your ASA as of Dec. 31, 1986.
  2. PRE-TAX: The entire amount of your ASA that has not had taxes withheld is taxable.
  3. POST-TAX: You may recover your 3 percent mandatory post-tax contributions, made after Dec. 31, 1986, with your monthly pension benefit.  A portion of your post 1986 contribution may be recovered in a lump sum while the remainder must be recovered along with your pension. Your account balance and other factors determine if you can recover a portion of your post-tax dollars in a lump sum. The remainder of your post 1986 tax basis must be recovered over a set number of monthly payments. The IRS determines the rate of recovery. A part of each monthly payment is non-taxable as long as the tax basis remains.

Any additional voluntary post-tax is treated in the same manner.

3. HOW DOES A POST-RETIREMENT ROLLOVER TO AN IRA OR QUALIFIED PLAN AT RETIREMENT AFFECT MY TAXES?

  1. PRE-1987: Your pre-1987 contribution is not rolled over. It is a 100 percent non-taxable distribution paid directly to you.
  2. POST-TAX: Your post-tax contribution is rolled over as taxable, even if you have already paid taxes on it. That amount is taxable under IRS rules and regulations. The tax will be recovered when you receive your pension from us. Basically, a portion of your pension benefit will be non-taxable until your post-tax contribution has been fully repaid to you. When your post-tax contribution has been fully recovered, the remainder of your benefit will be taxable. The post-tax contribution must be recovered over a set number of monthly payments. The IRS determines the rate of recovery.

4. HOW ARE MY TAXES AFFECTED IF I COMBINE MY ASA WITH MY PENSION AT RETIREMENT AND A PORTION IS CONSIDERED NON-TAXABLE?  

  1. PRE-1987: You have two options for your pre-1987 contribution: 1) Receive the contribution, tax free, as a lump sum or 2) Annuitize the contribution with your monthly retirement payment. If you choose to annuitize, the pre-1987 portion will be non-taxable and it will be recovered over a set number of monthly payments.
     
  2. POST-TAX: A portion of your pension benefit will be non-taxable until your post-tax contribution has been fully repaid to you. When your post-tax contribution has been fully recovered, the remainder of your benefit will be taxable. The after-tax contribution must be recovered over a set number of monthly payments. The IRS determines the rate of recovery.
  3. PRE-TAX: All pre-tax contributions are taxable.

5. WHAT IRS REGULATION MANDATES THAT A PORTION OF MY NON-TAXABLE BENEFIT MUST BE RECOVERED OVER THE LIFE OF MY PENSION?

Internal Revenue Service (IRS) publication 575 explains the rate of recovery for your tax basis.

6.HOW ARE MY TAXES AFFECTED IF MY VOLUNTARY CONTRIBUTIONS TO MY ASA ARE ALL POST-TAX?

  1. If you rollover your distribution to a qualified plan, it will be tax deferred. When you receive the benefit from the qualified plan it will be taxed. The tax will be recovered when you receive your pension from us. Basically; a portion of your pension benefit will be non-taxable until your post-tax contribution has been fully repaid to you. When your post-tax contribution has been fully recovered, the remainder of your benefit will be taxable. The post-tax contribution must be recovered over a set number of monthly payments. The IRS determines the rate of recovery.

7. HOW LONG WILL IT TAKE ME TO RECOVER MY POST-TAX CONTRIBUTIONS?

The amount of time that it will take you to recover your post-tax contribution depends on:

  1. Your age at retirement,
  2. The retirement option you selected when you completed your retirement application, and
  3. IRS Publication 575, which includes a table that gives you the exact number of months for your age and retirement option.

8. HOW DO I RECOVER MY AFTER-TAX CONTRIBUTIONS?

You will recover your contributions over a set number of monthly payments. The IRS determines the rate of recovery.  Each year, you and the IRS will receive a 1099-R form from INPRS. The form will report the amount of your taxable and non-taxable pension.

9. AM I TAXED TWICE IF I ELECT A LUMP SUM DISTRIBUTION?

No, you will receive the non-taxable portion of your contribution over a set number of pension payments. The IRS determines the rate of recovery.

10. WHAT IF I STILL HAVE QUESTIONS?

If you have more questions, please call our Customer Service Center at (888) 286-3544.