The state of California does not exempt retirement income from taxation. Unlike other states, California imposes income tax on all money you receive from your annuity. Annuities are insurance policies that guarantee an income to you for a set number of years or for your entire life. During your lifetime, these contracts serve as a savings account with an insurance company.
Qualified annuities are annuities qualified under the Employee Retirement Income Security Act (ERISA) and are generally purchased inside of an individual retirement account (IRA) or are naturally part of a retirement account. An example of an annuity retirement account would be a 403b plan. Teachers living and working in California are entitled to a 403b retirement plan -- a tax-sheltered annuity retirement account. For most qualified annuities, all of the money is contributed on a pre-tax basis. This means all distributions are taxed at California's ordinary income tax rate. The only exception to this is the Roth IRA. Roth distributions are not taxed after the account holder is age 59 1/2.
Non-qualified annuities are annuities not purchased inside of a retirement account and are not qualified by ERISA. The contributions to the annuity are not taxed when they're withdrawn. However, the state does tax all investment earnings you withdraw from such accounts.
Some states, like Florida, have no retirement income tax, so you do not pay income tax on your annuity income. California will tax all personal retirement savings, generally following the federal rules and regulations on whether income is taxable or not. This leaves you with less money than you otherwise would have received from your annuity had you lived in a tax-free state.
California does provide one exemption for nonresidents. If you're a nonresident receiving income from the state or a company you worked for in the state, you won't be taxed on any of this income. Federal law prohibits this, and California complies with this provision. This means you may move to another state, and once you're not a resident of California any longer, your annuity income will not be taxed under the California state income tax.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- California Tax Franchise Board: Pension and Annuity Guidelines