Income Taxes on PLSO Payments
Most, or all, of a PLSO payment is considered taxable income by the IRS.
- PSRS is required by the IRS to withhold 20% for federal taxes.
- If you receive your PLSO payment before you reach age 59 ½, you may also be subject to a 10% federal tax penalty in addition to the ordinary income tax owed. This penalty does not apply if you separate from service in or after the tax year in which you reach age 55.
- PLSO payments may also be subject to state income taxes, although not withheld by PSRS.
Defer Taxes with a Rollover ...
You can request a direct rollover of your lump-sum payment to a qualified retirement account, such as an IRA, to defer taxes and avoid the 10% penalty. Please keep in mind that taxed funds rolled over into a Roth IRA are considered taxable income in the year in which the rollover takes place.
Because PSRS does not offer tax advice, we strongly suggest that you consult a tax professional before making a final decision regarding the PLSO.