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Horizon Elder Law & Estate Planning Blog

Sunday, November 14, 2021

How are Annuities and Retirement Benefits Treated for Tax Purposes?

As you evaluate your preparations for retirement, you need to know how your income will get taxed after you stop working and have a fixed income. Many people rely primarily or solely on Social Security retirement benefits when they retire. Pensions are not as commonplace as they used to be. Some people invest in annuities and wonder if doing so was a prudent financial decision.

A California estate planning attorney can answer your questions, like, “How are annuities and retirement benefits treated for tax purposes?” and draft your estate planning documents.

Does California Tax Social Security and Railroad Retirement Benefits?

No, according to the State of California Franchise Tax Board, California does not tax these items:

  • Social Security benefits,
  • Tier 1 railroad retirement benefits,
  • Tier 2 railroad retirement benefits reported on federal Form RRB 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
  • Sick pay benefits under the Railroad Unemployed Insurance Act

The federal government does tax these things, however, so you will have to make an adjustment on your state income tax form for any of those items you included in your federal adjusted gross income.

Does My Military Pension Get Taxed if I Am a California Resident?

Yes, California does tax the military pensions of people who are residents of the state. It does not matter if you served in a different state. For state income tax purposes, the controlling issue is whether you are now a California resident.

Will California Tax My Annuity or Pension Benefits?

If you are a resident of California, you will get taxed on all of your income, including pensions you earned while working in other states, but not on the specific Social Security and railroad retirement benefits mentioned earlier.

Your retirement income taxation will be different if you are not a resident of California. If you receive a California pension but are not a resident of California, our state will not tax your pension. California stopped imposing taxes on the retirement income of nonresidents at the end of 1995. California defines retirement income for this purpose as any of these:

  • Qualified annuity plans
  • Tax-sheltered annuities
  • Section 401 qualified plans
  • Section 414 governmental plans
  • Some deferred compensation plans
  • Roth IRAs, SIMPLE IRAs, and some other IRA accounts

There are additional types of retirement income that California includes as nontaxable for people who are not California residents.

How Does California Treat Individual Retirement Accounts (IRAs)?

In general, our state treats the taxation of IRAs the same as the federal government does. Depending on your total income, you might either get no deduction or only a partial deduction if you participate in an employer’s retirement plan or your jointly filing spouse does. California follows the federal rules on deductions for IRA contributions.

There is one notable difference between how the Internal Revenue Service (IRS) and California approach the tax treatment of IRA contributions. California allows you to designate otherwise deductible IRA contributions as nondeductible, and this election can be different from how you handle this issue on your federal tax return.

A California estate planning attorney can help you evaluate your needs and goals and create a plan for your retirement. Get in touch with our office for a free consultation.


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