Q: Are my retirement benefits taxable?
A: In short, yes, but only after you start receiving those benefits as income.
Before you retire, the contributions made by you or your employer to your APERS retirement account are tax deferred, meaning that you do not report them on your tax return or owe taxes on them yet. This makes sense because that money is not available to you as income. However, if a contributory member terminates covered employment and takes a refund of his or her employee contributions, that refund will be taxable as income.
Once you retire and begin drawing an APERS retirement annuity, those payments become taxable income. APERS will report them to the IRS, and you must enter them on your yearly tax return. From there, IRS regulations and federal law will determine how much tax (if any) you owe on those payments, but it usually comes out about the same as it would if you earned that amount in wages. State laws vary, but Arkansas also classifies your APERS pension as taxable income that must be reported on your state return.
Shortly after the end of each calendar year that you receive benefits, APERS will provide you with a 1099R tax form that lists your taxable retirement income for the year. The 1099R will take the place of the W-2 wage and earnings forms you received while working. Also, at your discretion, APERS will withhold both state and federal taxes from your benefit payments. You can instruct us to stop or start withholding or to change your rate whenever you wish.
If you have beneficiaries who are eligible to receive contribution refunds or continuing annuity payments in the event of your death, they are probably subject to the same tax liability you would be. APERS will also provide a 1099-R to beneficiaries for each year they receive taxable benefits.
APERS cannot advise you on matters related to state or federal income tax or your personal finances. The IRS and the state provide numerous resources to help you with your taxes, and you may also want to consult a tax service or financial professional.
Note: Contributions made by members under APERS' original contributory provisions were taxed in the year they were made. Consequently, if those contributions are refunded, they are not subject to additional tax.