Taxability of Pensions
In most cases the retirement allowance will be taxable by the Federal government; however, if after-tax contributions were made, a portion of the pension will remain tax-free each year until a recovery of the “Investment in Contract.”
The Investment in Contract is divided by the total number of anticipated monthly pension payments based on the retiree’s age (and the beneficiary’s age, if a Survivorship Option is elected) as of the date that the retiree’s pension begins. The tax-free portion of each monthly pension payment remains unchanged until the retiree has fully recovered his/her Investment in Contract, at which time the pension is fully taxable. Please refer to IRS Publication 575 for additional information.
Filing Status/Withholding Allowances
When members file for retirement, they must complete a Form W-4P Federal Withholding Certificate on which they indicate their filing status and number of withholding allowances, or they may elect to have no Federal taxes withheld from their pension. If retirees do not complete a W-4P Federal Withholding Certificate, NHRS is required by law to withhold taxes from their pension as if they were married and were claiming three withholding allowances. Any questions regarding taxation should be directed to a tax consultant or the IRS.
Retirees may change their filing status by completing a new W-4P Federal Withholding Certificate with NHRS.
IRS Form 1099-R
A 1099-R is an IRS form that reports a taxpayer's distributions from pensions and/or other retirement plans. Form 1099-R reports the gross distribution, any taxable amount applicable to that gross distribution, and any portion of federal income that was withheld, as well as other tax information.
NHRS annually mails a 1099-R to the current address on file no later than January 31 of each year. If you have moved and not yet notified NHRS, you can access a Personal Information Change Form here.
Click here for a FAQ on reading your IRS Form 1099-R.