Income Tax on Refunds
Your refund may be subject to income tax. If the taxable portion of your refund is $200 or more, the IRS requires PSRS to withhold 20% for federal taxes. You may also incur an additional 10% tax penalty if you are under age 59½ at the time of the refund. This penalty generally does not apply if you separate from service in, or after, the tax year in which you reach age 55.
You may also incur a state tax liability on your refund.
Taxes are payable on the portion of your refund that is made up of:
- Contributions made after June 30, 1989,
- Interest added to your account during your membership, and
- Any tax-deferred funds you used to pay for a purchase or reinstatement of credit (rollovers).
Taxes are not payable on the portion of your refund that is made up of:
- Contributions made before July 1, 1989 (before this date taxes were withheld from your contributions by your employer before being sent to PSRS), and
- Any taxed dollars used to purchase or reinstate credit with PSRS.
You can defer taxes and eliminate the federal 10% penalty if you choose a direct rollover of your funds to an Individual Retirement Account (IRA) or other eligible retirement plan. We strongly advise that you read the brochure, Your Rollover Options, which you will receive with your Refund Application. For further assistance you may wish to consult a tax professional.
If you turn age 701/2 before or during the tax year of your refund payment, PSRS will calculate the IRS Required Minimum Distribution (RMB) payment as required by the IRS, and make this payment directly to you.
If you request a Refund Application, detailed tax information and payment options will accompany the form.
The retirement office staff does not answer individual tax questions or give tax advice. Inquiries should be referred to a tax professional or to the appropriate state or federal taxing agency.